Your 2021 Newsletter from Brouse McDowell

Amanda M. Leffler

The past year has been a busy one for Brouse McDowell’s insurance recovery practitioners. An evolving workplace model and ongoing fall-out from the COVID-19 pandemic have continued to impact the insurance market, including the types and frequency of insurance claims. More than ever, policyholders are seeking our counsel to assist them in selecting and purchasing insurance coverage that will shift the risks of their enterprise and function in the manner contemplated at the time of purchase.

The importance of understanding the coverage being purchased before a loss or injury occurs has been highlighted, in no small part, by the experience many companies have had with insurance claims related to COVID-19. The news is flooded with stories of policyholders whose claims have been unexpectedly denied by their insurers. Of course, business interruption coverage for COVID-related losses is still a hotly litigated issue, in both federal and state courts nationwide. Our insureds also continue to demand that insurers honor their obligations under other types of policy coverages—communicable disease, environmental, and event cancellation. Until state supreme courts decide many of these issues, however, coverage for COVID-19 losses is likely to continue to be contested.

Brouse has also seen several of its clients shift their business models to permit, or even require, regular remote work. This fact, and the evolving nature of cyber risk, highlighted in this newsletter, have made procuring sufficient cyber insurance coverage more critical than ever. For some, though, obtaining comprehensive cyber coverage at reasonable premiums has been a challenge. This is also true in other markets, including directors & officers and property & casualty.

Rising risk awareness, the pandemic, increasing natural disasters, stock market volatility, and an unprecedented number of insurance claims have created a “hard” insurance market. This impacts policyholders in several ways. In underwriting, insurers are likely to raise premiums, reduce the number of policies they issue, refuse to insure certain risks, and narrow the scope of coverage. With respect to claims, insurers are likely to deny claims with more frequency and are less likely to negotiate reasonable resolutions of disputed claims with their insureds.

Brouse McDowell has been assisting our clients with their insurance coverage needs for decades—in both soft and hard markets—from working with insurance brokers to understand and negotiate policy terms, to advocating zealously for our clients when claims are wrongfully denied. In this issue, we discuss some things on the horizon, as well as issues facing our corporate clients with increasing frequency. 

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Cyberattacks in 2021 Demonstrate Importance of Cyber-Risk-Insurance for 2022

Craig S. Horbus, Jarman J. Smith

As cyber-related incidents continue to grow in number, we are advising companies to place even more emphasis on Cyber Risk Coverage for 2022. The volume of new clients seeking out representative breach counsel regarding cyber-attacks grew immensely in 2021. As a result, Brouse has been called to action in an expanded capacity. From this firsthand experience, we have observed the need for many businesses and organizations to prioritize cyber-risk insurance coverage to contain their liability in the event of a cyber-incident. Along with prioritization comes scrutinization of the policies and the coverage being provided. As companies and policyholders alike increase their awareness of digital threats and their knowledge of coverage-related issues, the cyber-risk insurance industry is being called upon to provide not only an increase in coverage, but also adequate, or even new coverage, in historically weak areas to help ease liability concerns resulting from an alarming number of cyberattacks that wreaked havoc throughout 2021.

Cyber-Risk Insurance Essential to Addressing Cyberattacks

We can expect another increase in cyber-related attacks this year. Cyber-related impact events such as ransomware and data breaches continue to remain our number one focus as we head into 2022. Looking back at 2021, the Identity Theft Resource Center reported that the number of data breaches in 2021 surpassed 2020’s figure even with three months remaining in the year.¹ As the tactics of cybercriminals continue to evolve and become more sophisticated, we can anticipate that the number of data breaches in 2022 will be even higher than the numbers in 2021. So how can organizations best protect against cyber risks in the year ahead? By prioritizing cybersecurity companywide, including compliance and incident response planning, along with obtaining a comprehensive cyber-risk insurance policy, companies will be ahead of the curve when it comes to mitigating damages of an inevitable attack.

Cyber-risk insurance can be thought of as a collection of coverages that protect your company from a variety of incidents, including data breaches, ransomware attacks, digital destruction, and the resulting damages of the foregoing. A comprehensive cyber-risk policy will likely include more than a few separately identified coverage options, but there are four essential coverages that we would advise all companies to carry to protect your interests during a cyber incident.

Extortion Coverage

Extortion coverage operates as ransomware recovery support. It can provide monetary reimbursement if your organization is forced to pay a ransom to regain access to compromised systems and/or for the return of stolen data. If properly obtained, this coverage may also cover the cost of hiring professionals, such as competent legal counsel, to negotiate with the cybercriminals on your behalf. In 2021, the average ransomware payment increased by 82%. A ransom demand can be crippling for many businesses and can provide a swift ending to many small businesses. With an increase in attacks in 2021, it’s more important than ever to build up your defenses in anticipation of a cyber event. Now is the time to ask your professional team to do a complete cyber-risk audit to uncover any gaps in your cybersecurity protocols.

Business Interruption Coverage

Business interruption coverage is designed to compensate you for the loss of income that results from the downtime your organization may face after a cyber incident. If your system or network was paralyzed, corrupted, or otherwise made inaccessible as a result of a cyberattack, your business could come to an abrupt halt. And when operations are down, lost revenue is a certainty. Business interruption coverage can cover expenses you incur related to your efforts in restoring your operations.

Data Loss/Data Restoration Coverage

Data restoration coverage is designed to cover the costs of replacing or restoring compromised data resulting from a virus, ransomware, or another form of cyber incident. Most businesses would like to act with urgency to quickly and fully recover their data after a cyberattack. Doing so can reduce downtime and can help restore trust in your business.

Incident Response Coverage

Incident response coverage covers expenses related to the various expert services that your organization may need to remediate the effects of a cyber incident, to restore security protocols and prevent future security issues. For instance, a data breach can require a thorough investigation by a computer forensics team to determine the breach cause and prevent future occurrences. You will also need to enlist the services of competent cyber legal counsel and— depending on the level of breach— you may need a public relations firm, and consumer ID monitoring and notification specialists.

How Brouse Can Help

Ransomware and other cyber-related incidents will likely remain the number one threat to companies in 2022. Organizations must be prepared to do everything they can to mitigate the damage of an inevitable attack. We advise having cyber legal counsel conduct a review of your existing policies and protocols in place to ensure compliance with all data privacy laws and regulations, revise and update those that need attention, review existing insurance and fill any gaps to obtain appropriate levels of cyber-risk insurance to further reduce exposure to cyber-related risks. Cyber-risk insurance is complex, and it may leave many confused as to what adequate coverage looks like. Failing to obtain the right coverage could leave your organization exposed to substantial risks in the event of a cyber incident. It is important to have assistance from competent professionals as you analyze your security and seek to obtain cyber coverage. Brouse McDowell’s Insurance Recovery and Cybersecurity & Data Privacy teams can provide the guidance and tools you need to defend against cyberattacks, protect consumer information and obtain proper cyber-risk insurance coverage. Please contact us for more information and to learn how we can partner with you. 

¹See https://www.propertycasualty360.com/2021/12/29/cyber-insurance-in-2022-a-year-for-collaboration/.

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Tips for Managing Supply Chain Risks

Joseph K. Cole, Lisa M. Whitacre

Anyone who has purchased, or tried to purchase, a new vehicle, a bicycle for their child’s birthday (speaking from personal experience), certain electronics or appliances, or other high demand products or services has likely experienced the effects of global supply chain disruptions causing businesses both big and small to struggle to meet demand or even continue operating. The reasons for these disruptions are complex and multi-faceted, but there is little doubt that the global pandemic has and continues to play a significant role. Some predictions however, anticipate that supply chain disruptions will continue for the next year or more and could outlast the global pandemic.

So how does a business manage supply chain risks? One tool is insurance. Below are four tips for maximizing insurance as a strategy for managing supply chain risks.

Know and Understand Your Policies

A policyholder may have a number of different types of policies that cover different losses, including:

• Business interruption (BI) coverage that covers a policyholder’s lost profits if the policyholder’s operations are interrupted due to a covered peril. BI insurance provides coverage for lost earnings and may also cover expenses like rent, utilities, and employee wages.
• Extra Expense Coverage that covers certain additional expenses in excess of normal operational costs that a policyholder may incur, enabling the policyholder to continue operations while its property is repaired or replaced after a covered loss.
• Contingent Business Interruption (CBI) insurance helps cover a policyholder’s financial losses related to disruptions of a covered supplier, partner, manufacturer, or major customer that negatively impacts a policyholder’s ability to operate.
• Supply chain coverage is a specialty “all risk” insurance designed to protect policyholders from a failure in their supply chain.
• Other specialty insurance and manuscript policies – there are other specialty insurance products available in the market, and many businesses, particularly larger businesses, negotiate manuscript policies that are tailored to meet their specific needs.

The specific terms, exclusions, and endorsements in these policies vary greatly. For example, BI and extra expense coverage often, but not always, require physical loss or damage to covered property. These policies typically cover the policyholder’s property (as opposed to a supplier or customer) and therefore will not cover losses arising out of physical loss or damage of a supplier’s property or facility. CBI insurance, which would cover a supplier or customer, may also require physical loss or damage; however, many CBI policies, particularly foreign ones, do not have such a requirement.

For policyholders seeking coverage because of disruptions related to COVID-19 and related government shutdown orders, policies without a physical loss or damage requirement are more likely to provide coverage.

Whether there is coverage under policies with a physical loss or damage requirement is dependent on whether a “physical loss” has occurred. Courts across the country have struggled with that question reaching differing results. The Ohio Supreme Court is expected to address the issue this year in Neuro-Communication Servs., Inc. v. Cincinnati Ins. Co., No. 2021-0130. Another important consideration is whether the policies have a virus/bacteria exclusion and whether the policies include or exclude communicable disease coverage. Knowing which policies you currently have and understanding what they cover is critical.

Know and Understand Your Supply Chain and Identify Potential Coverage Gaps

Understanding the ins and outs of your supply chain is also critical in managing the risks associated with it. A small business transacting locally or even within the continental United States is less likely to run into the same sorts of risks as organizations with complex supply chains, international suppliers, or suppliers in politically unstable areas, and those differences help determine whether CBI, supply chain, or other specialty coverage makes sense for your business.

• Where more complex coverage is warranted, it is important to take a hard look at your supply chain. Here are a few questions to consider:
• Should just the first tier of suppliers or the entire supply chain be covered?
• Are there certain products or materials where no viable alternative supplier is available?
• Are there suppliers or customers that are critical to the continued operations of your business?
• Are there unique risks associated with your business that justify obtaining a manuscript policy specifically tailored to those risks?

These considerations must be balanced with the cost of obtaining additional coverage. The takeaway is that there isn’t a one size fits all approach when it comes to managing your supply chains risks.

Identify Current Disruptions

Navigating an existing disruption can be harrowing, though pinpointing the precise location and, sometimes, like in today’s supply chain, multiple locations of the disruption can reveal coverage triggered under one or more existing policies. For example, your business may experience disruptions related to a government order requiring a first-tier supplier to shut down while at the same time, a second-tier supplier may be experiencing staffing shortages and production delays. On top of that, necessary materials or parts may be delayed at sea. Fully understanding each of these unique disruptions in the whole of your organization’s supply chain will be invaluable in assessing potential coverage.

Document all Potentially Covered Losses

Get in the habit of documenting all losses, including those you believe are covered and those you’re not so sure about. As the pandemic and supply chain disruptions continue to wreak havoc, economic risks and the legal landscape continue to evolve. Whether a claim is covered depends on the specific terms, exclusions, and endorsements of your policies, all of which are interpreted by our courts in light of the circumstances of the claim. What you assume is an uncovered loss, could, in fact, be covered by one or more policies. 

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2022 Ohio Supreme Court Update

Lucas M. Blower

The way most general liability insurance policies are structured is that they start off with a very broad coverage grant, applying to all damages that the insured becomes legally obligated to pay because of bodily injury or property damage caused by an occurrence. An occurrence, in turn, is defined broadly as an “accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

After this broad coverage grant, the policy will usually include a battery of exclusions that narrow the coverage.

So, following this broad structure, a typical insurance policy will give with one hand (the coverage grant) and take away with the other (the exclusions). And because the coverage grants are traditionally so broad, for most first-party and third-party risks, the question of coverage comes down to the exclusions—that is, whether the other hand took away what was given in the coverage grant.

But now, in a pair of insurance cases pending before the Ohio Supreme Court, insurers are attempting to subvert this usual structure. Instead of focusing on whether the exclusions apply, they argue that the risk does not fall in the broad coverage grant in the first place. It does not matter, according to these insurers, whether the exclusions took away coverage because as they argue, it was never given in the first place.

In Motorists Mutual Ins. Co. v. Ironics, Inc., the policyholder sold defective tube scale to its customer. Tube scale is a product used to make glass bottles. Because the tube scale was defective, the resulting glass bottles were unusable. The policyholder’s customer demanded to be reimbursed for the damage. The policyholder, in turn, tendered the claim to its insurer, who denied the claim.

Now, most liability policies have an exclusion for damages to “your product”—meaning the insured’s product. This makes sense, since liability policies in general cover damage to third-party property, not the policyholder’s property. (Those sorts of losses are covered by first-party insurance, which is subject to its own slate of exceptions.)

In Ironics, though, the policyholder has a strong argument that the exclusion for damages to “your product” did not apply. This is because the ultimate damage was not to the policyholder’s product—the tube scale—but to its customers product—the glass bottles.

The insurers in Ironics disagreed with this interpretation of the exclusion, arguing that it applied to the glass bottles because they were integrated products, such that the glass bottles were inseparable from the tube scale. But the insurers also went further, questioning the premise of whether the loss was insured in the first place.

According to the insurers, regardless of whether the “your work” exclusion applied, the loss was not covered because it was not “fortuitous.”

The Ohio Supreme Court first invoked the “doctrine of fortuity” in Westfield Ins. Co. v. Custom Agri Sys., Inc., 133 Ohio St.3d 476, 2012-Ohio-4172, 979 N.E.2d 269, a case holding that liability insurance does not generally cover damages for claims of alleged defective construction and workmanship to the insured’s own work. The Ohio Supreme Court held that—to count as “property damage” caused by an “occurrence”—the damage had to be fortuitous.

But it was not clear from Custom Agri what the so-called fortuity doctrine added to the traditional analysis. It was always the case that general liability policies applied only to accidental damage. So, it was never clear what a fortuity element added. It seems incoherent to say that a loss could be accidental but not fortuitous. But, if this is what the Ohio Supreme Court was holding—i.e., that there were non-fortuitous accidents—how were policyholders supposed to tell the difference? And what basis was there in the policy language to distinguish between different types of accidents, fortuitous on one side and non-fortuitous on the other, when the language of the coverage grant applied to all accidents?

These distinctions were never fully addressed in Custom Agri or in subsequent cases. Predictably, then, in later cases, such as Ironics, insurers seized on the “fortuity” doctrine, arguing to expand it to preclude coverage for even more types of accidental losses. The whole project, though, is only possible if insurers are permitted to introduce new concepts such as an ill-defined “fortuity doctrine,” in the coverage grant, where they don’t belong.

What’s more, once the insurers got a taste for adding restrictions into the coverage grant, they did not stop with the fortuity. In Acuity v. Masters Pharmaceutical, for example, another case pending before the Ohio Supreme Court, the insurers are arguing the term “legally obligated” in the coverage grant applies only to tort liability.

The policyholders in Acuity are manufacturers and distributors of opiates. The insureds were sued by local and state governments claiming they had to pay increased costs for medical and police services, among others, as a result of the opiate epidemic. The governments are seeking to recover against the manufacturers and distributors based on their role in setting off the epidemic.

The policyholders tendered the government’s claims to their insurers, which denied the claims for a number of different reasons. Most relevant here, the insurers argued that the claims were not covered because the governments’ claims were for economic damages, not direct tort liability for bodily injuries. As such, according to the insurers, the losses were not covered because the terms “legally obligated to pay as damages” in the coverage grant “clarifies that [to be covered] the insured’s obligation must arise from the breach of a non-contractual duty.” (Appellant’s Reply Br. 6.) So according to the insurers, the coverage grant is restricted to traditional tort liabilities.

As an initial matter, it is not clear that this supposed tort restriction on the coverage grant would have any bearing on the policyholder’s claims in Acuity. After all, the governments are not suing the policyholders for breach of contract. They are suing in tort. So even if the insured’s purported tort restriction existed, it wouldn’t preclude coverage in Acuity.

More importantly though, for our purposes, there is no tort restriction in the coverage grant. The policy applies to damages that the insured is “legally obligated to pay as damages.” The insurers argue that this phrase applies only to non-contractual duties But they provide no compelling reason for this proposed restriction. The language does not say “legally obligated in tort.” As such, it applies to all legal obligations. And it should not be a matter of great controversy that contractual obligations are, in fact, legal obligations (though the insurers’ confusion on this point is perhaps more telling than they realize).

Both of these cases—Ironics and Acuity—demonstrate a coordinated effort amongst insurers to restrict the coverage grant beyond what is warranted by the language in the policy. Policyholders and the courts should resist these efforts. Every policy gives coverage in one hand and takes it back in the other. But the takebacks should happen in the text of the policy. And if the insurers didn’t take back coverage in their exclusions, the courts shouldn’t do it for them. 

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Utilizing Representations and Warranties Insurance in M&A Transactions and Related Financing

Molly Z. Brown & TJ Noonan, Hylant

Merger and acquisition (M&A) transaction participants are increasingly using representations and warranties (R&W) insurance to provide coverage for breaches of R&W in purchase agreements. In the last few years, R&W insurance has become a commonplace insurance product and a mainstay component of private M&A transactions north of $50 million.

We spoke with insurance broker Hylant’s T.J. Noonan, Managing Director, Transactional Risk, who specializes in placing R&W insurance. According to Noonan, current policy limits range from $3 million up to $1 billion. Typically, this equates to deal sizes of $20 million to $10 billion, with deals between $50 million and $500 million being the most common. Noonan confirmed 2021 underwriting activity for M&A transactions for less than $30 million. In these deals, buyers obtain a higher proportion of coverage to the deal value (i.e., greater than 10%), with minimum out-of-pocket costs for a buyer ranging from $160,000 to $200,000, for a $3 million limit.

An R&W insurance policy protects an insured against financial loss— including defense costs— resulting from breaches of such R&W, and in certain cases covers indemnification in the purchase agreement. This type of insurance can be used by public and private entities, in both change of control situations and non-control minority investments. In addition to the standard exclusions discussed below, R&W insurance does not cover breaches in covenants in the purchase agreement.

Policies Can be “Seller Side” or “Buyer Side”

R&W insurance can be purchased as either “Seller Side” or “Buyer Side” coverage.

Seller Side policies serve as a liability policy providing coverage to the seller for its liability for claims for breach of R&W in the purchase agreement made to the buyer. This type of policy would pay the seller as named insured, not the buyer. By comparison, a “Buyer Side” policy is a form of first-party coverage that allows the buyer to be compensated directly by the insurer. A common added variation to “Buyer Side” policies also protects the seller by preventing the insurance company from seeking recovery from the seller except in cases of fraud. We highly recommend this variation be explored for our clients that are sellers.

When Hylant assists its clients in obtaining R&W insurance, the named insured is often the buyer in the transaction, with lenders providing acquisition financing as additional insureds. By having the buyer and lender as named insured and additional insured, respectively, they can be paid directly from the insurer. This mitigates any collectability issues or controversy presented, which is desirable in distressed transactions or transactions with more than a single selling shareholder. In the event of a breach of any R&W in the transaction, after accounting for the retention, the insured would receive a payment to offset their loss up to the maximum policy limits.

Introducing R&W Insurance in the Deal

Sellers utilizing an investment banker led competitive bid or auction process often stipulate R&W insurance as a bid qualification and a means they are proposing to avoid an escrow. By comparison, buyers seek R&W insurance when indemnity is limited or absent, or when escrow is not able to be obtained. Since indemnity provisions are often the most negotiated section in purchase agreements, R&W insurance provides a mechanism for parties to bridge the gap by shifting risk of breaches in R&W made by the seller and the collectability of indemnity to an insurer in exchange for a policy premium by providing the buyer, as the named insured, the ability to collect from the insurer. Banks and other lenders providing credit are increasingly requiring R&W insurance as a condition of term sheets and a means to shift risk. The following table provides a summary of the benefits available to buyers, sellers, and lenders.

Policies are Deal-Specific

R&W insurance is unique in that it is fully customizable and negotiated on a deal-specific basis. Policy limits typically range between 10-20% of the enterprise value of the transaction with retentions set at 1% to 3%. Premiums typically range from 3.5-5% of the policy limits. Because of the time-intensive underwriting, insurers are less motivated by deals below policy limits of $3 million and charge underwriting fees of $15,000 to $40,000.

Insurance capacity for the R&W product is robust comparable to other areas in the insurance market. Capacity in this relatively new market continues to be positively affected by insurers attempting to enter this market.

Recognizing Limits of Risk Transfer

Buyers need to recognize that R&W insurance, while a means to transfer risk from the buyer’s balance sheet, does not provide as broad of coverage as a seller escrow of the same size. For example, R&W insurance does not provide coverage for covenants and special indemnities provided in transactions or information disclosed in due diligence. Buyers also need to account for premiums, retention, and underwriting fees for R&W insurance that the buyer will pay as part of their deal models.

Likewise, each insurer’s policy will be different, and it is important to read and know the differences before procuring the product and to tailor those to the policyholder’s needs and the circumstances surrounding the deal. Many R&W policies contain the following exclusions:

Hylant’s Noonan explained that industry norm is that retentions are cut by 50% after year one. This is primarily driven by the fact that 66% of claims (greater than $1 million) are reported within the first year, according to AIG’s Claims Intelligence Series. See AIG Claims Intelligence Series: M&A: A rising tide of large claims, at page 4 (available at www.aig.com/business/insurance/mergers-and-acquisitions/mergers-and-acquisitions-claims-reports (visited Feb. 18, 2022)). Because this is a customizable product, policies often have a step down of the retention after the expiration of any indemnities provided by the seller under the purchase agreement.

Underwriters are also known to provide coverage for pre-sale tax indemnities covered in the purchase agreement. Certain fundamental representations may be able to obtain nil retention if made as part of the transaction related to authority to conduct the transaction, ownership of shares, and no brokers other than as listed on disclosure schedules.

Underwriting Process

The underwriting process is becoming increasingly more stringent. Required information serving as the foundation for the underwriting process includes:

• draft purchase agreement,
• offering memorandum,
• any documents describing target’s business,
• a copy of recent financial statements, and
• existing due diligence reports and data room information.

Insurers will also expect to participate in conference calls with the insured’s deal team. Typically, audited financial statements and a quality of earnings report from a qualified external CPA are required before binding of coverage by underwriters. This last requirement can take eight (8) weeks or more.

Due diligence trends related to enforcement of matters on regulators’ radar, past litigation history, environmental concerns, and long-term liabilities are always key concepts that underwriters are keen to address. According to Noonan, employment-related claims such as independent contractor vs. employee classification continue to receive increased focus from underwriters.

How Brouse Attorneys Can Help

Because of the unique nature of the underwriting of this risk, it is important for purchasers of R&W insurance to have a trusted adviser helping them to negotiate terms of the policy and to ensure it is customized to meet their objectives. Brouse attorneys are experienced in negotiating terms of R&W insurance and in serving as liaison with insurers for companies involved in transactions. Our insurance team is accustomed to augmenting our firm’s deal lawyers to facilitate obtaining insurance, negotiating on exclusions, the closing of deals, and working with our clients’ deal lawyers at other firms to ensure the best coverage possible is obtained. Should you need help with M&A insurance due diligence, please do not hesitate to reach out. 

R&W Insurance Benefits

Buyers	Sellers	Lenders
• Adds protection to indemnity cap and survival periods • Provides recourse in absence of seller indemnity • Preserves key relationships • Ensures collectability • Enhances competitive bids • Offers protection to deal financing creditors	• Provides backstop or replaces negotiated indemnity • Eliminates or reduces escrow • Allows minority sellers to avoid joint and several liability • Provides peace of mind for family and individual sellers • Enhances disclosure schedules	• Offers longer term than reps and warranties in purchase agreement • Allows lenders to be additional insureds; and collectability is direct from insurer • Enhances underwriting • Mitigates risk presented by escrow or absence of conditions precedent • Facilitates prepayments in specific circumstances

R&W Insurance: Standard Policy Exclusions

• Asbestos/PCB
• Healthcare Billing and Coding
• Criminal Fines and Penalties
• Net Operating Losses
• Insured’s Actual Knowledge at Binding of Coverage
• Pension Underfunding/Withdrawal Liability
• Medicare/Medicaid Reimbursement Risks
• Post-closing Purchase Price Adjustments
• Transfer Pricing

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Maximizing Coverage for Government Investigations

Stacy RC Berliner

The Biden administration and government agencies have indicated that in 2022 companies will see an increase in investigations, regulatory oversight, and enforcement actions by the U.S. Securities and Exchange Commission (SEC) and Department of Justice (DOJ). Specifically, government agencies have stated that they intend to take an aggressive approach regarding anti-corruption and compliance, failure of entities to maintain adequate cybersecurity practices and controls, regulation and compliance surrounding cryptocurrencies, environmental investigations and enforcement, and climate disclosures and risk.

Typically, the government’s first step is an investigation, which involves letters requesting information, subpoenas, civil investigative demands (CIDs), or formal orders of investigation. Investigations require engaging experienced counsel, reviewing and producing documents, preparing and conducting witness interviews and testimony, and responding to numerous inquiries. They can be disruptive and expensive. That’s why it is imperative that companies re-examine their insurance policies and take steps to maximize coverage.

Coverage often depends on whether subpoenas, CIDs or other documents issued as part of governmental investigations, constitute a “claim” alleging a “wrongful act” as defined by your D&O, E&O, or professional liability policies.

Do I Have a Claim That Can be Covered?

What constitutes a claim can vary greatly between policies. Some policies only cover “regulatory investigations commenced by formal orders of investigation,” while others expressly exclude “investigations of an organization.” These narrow definitions are problematic to obtaining coverage if the government agency merely issues a letter requesting information – albeit one the company cannot ignore. Other policies, which define a claim to include “investigations of the Insured related to a Wrongful Act” or for costs associated with responding to “informal information requests”, are more likely to provide coverage.

Does the Government’s Investigative Document Allege a Wrongful Act?

A wrongful act is typically defined broadly to include an actual or alleged breach of a duty, neglect, error, misstatement, misleading statement, omission, or act by the policyholder. Insurers argue that a subpoena or CID does not and cannot “allege” a wrongful act, but merely ask for documents or testimony. Some courts have agreed with insurers. See, e.g., MusclePharm Corporation v. Liberty Insurance Underwriters, Inc., 712 Fed.Appx. 745, 754 (10th Cir. 2017). However, other courts examine the subpoena or CID more carefully to determine whether it, or the letter accompanying it, alleges violations of law or statute. The Delaware Superior Court held that a CID which stated the government was investigating possible Medicaid fraud and activities, does allege a Wrongful Act. Conduent State Healthcare, LLC v. AIG Specialty Ins. Co., No. CVN 18C12074 MMJCCLD, 2019 WL 2612829, at *6 (Del. Super. Ct. June 24, 2019). Increasingly, SEC subpoenas, tolling agreements, and CIDs include language where the government expressly states that there is a possible violation of various federal criminal statutes and, thereby giving policyholder’s the argument that the document does allege a Wrongful Act and coverage should be afforded.

Coverage often turns upon the specific definitions in your policy, the types of documents issued by a government agency, types of proceedings initiated by the government, and geographic locations of the dispute. With an increase in investigations on the horizon, companies should waste no time in re-examining policy terms and attempting to negotiate more favorable terms if necessary.

If an investigation begins, timing and tenacity could mean the difference between a covered and uncovered claim. Policyholders should take steps to maximize their coverage for these investigations.

Steps to Maximize Coverage for Government Investigations

1. Upon notice of a government investigation or receipt of a subpoena, CID, or similar document: contact the person responsible for insurance—risk manager, general counsel, broker, or outside counsel—to examine and evaluate claims of coverage. With the ever-changing law, complexity of investigation, and differing policy language, be cautious that coverage is often misunderstood; bad advice can cost you.
2. Gather all applicable policies – D&O, E&O, EPLI, and professional liability policies.
3. Review all policies. Analyze what constitutes a claim; what constitutes a Wrongful Act; and who qualifies as an Insured.
4. Strictly follow the notice requirements. When in doubt, provide notice. Some claims require immediate notice. Some policies may require notice when the insured has knowledge of potential claims, Wrongful Acts, or related acts. Demand an immediate defense in the notice letter.
5. Actively pursue coverage.
   1. Respond to all mischaracterizations of fact and coverage.
   2. Keep the insurer apprised of the investigation.
6. Engage insurance recovery counsel, if needed, to enforce your rights under the policy(ies).

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Attorney Highlights

Accolades

The Insurance Recovery Practice was recognized for the second year in a row by Chambers USA 2021 in Band 1 for Insurance: Policyholder (Ohio) and Stacy RC Berliner, Lucas M. Blower, Amanda M. Leffler, Andrew W. Miller, and Paul A. Rose were ranked as leading practitioners.

The Insurance Recovery Practice was recognized by U.S. News – Best Lawyers’ “Best Law Firms” 2022 in Tier 1 for Insurance Law (Akron, Cleveland, and Fort Myers) and Tier 1 for Insurance Litigation (Akron).

Recognized by The Best Lawyers in America 2022 – Christopher J. Carney, Clair E. Dickinson, Amanda M. Leffler, Joseph P. Thacker, and Richard S. Walinski for Commercial Litigation; Stacy RC Berliner, Lucas M. Blower, Amanda M. Leffler, Paul A. Rose, and Joseph P. Thacker for Insurance Law.

Joseph K. Cole and Nicholas J. Kopcho noted as “Ones to Watch” by The Best Lawyers in America 2022 for Insurance Law.

Recognized by Ohio Super Lawyers 2022 – Stacy RC Berliner, Lucas M. Blower, Amanda M. Leffler, and Paul A. Rose for Insurance Coverage; Christopher J. Carney, Kerri L. Keller, Nicholas J. Kopcho, P. Wesley Lambert, and Richard S. Walinski for Business Litigation.

Recognized as Rising Stars by Ohio Super Lawyers 2022 – Alexandra V. Dattilo for General Litigation and Nicholas J. Kopcho for Business Litigation.

Joseph K. Cole received the UToledo Emerging Leader Award from the University of Toledo College of Law.

David Sporar recognized by Who’s Who in America for 2021.

Publications & Media Mention Highlights

Stacy RC Berliner and P. Wesley Lambert noted in Law360’s article “Three Insurance Appeals To Watch At State High Courts in March.”

Stacy RC Berliner and Amanda M. Leffler presented for the northeast Ohio Chapter of RIMS on “Shifting Risk: Drafting Contractual Insurance and Indemnity Provisions to Provide the Protection you Contemplated.”

Andrew W. Miller spoke at an OSBA CLE program titled “National Developments in Insurance Coverage: A Year in Review.”

Amanda M. Leffler and P. Wesley Lambert noted in Westlaw and Law360 regarding first-of-its-kind in Northern District of Ohio Zoom jury trial resulting in a successful verdict for client.

Joseph K. Cole wrote a blog “COVID Coverage Cases Turn on Policy Language.”

Brandi L. Doniere and Amanda M. Leffler presented at Strafford Publication’s Virtual CLE titled “GC’s Role in Remote Work Legal Issues: Data Governance, Privacy, Automating Documentation, Employee Communication.”

Anastasia J. Wade wrote a blog “Reimburse Your Insurer? Look to the Recent Decision by the Nevada Supreme Court.”

Jarman J. Smith wrote a blog “Recent Cyberattacks Complicate Cyber Insurance Industry and Coverage.”

Joseph K. Cole noted in Law360’s article “Policyholder Attys Eye Ohio Justice’s Role In COVID-19 Fight.”

Paul A. Rose noted in Law360’s article “Drug Co. Owed Defense In Opioid Suits, Ohio Justices Told.”

Joseph K. Cole and Lisa M. Whitacre wrote an article for the Cleveland Metropolitan Bar Journal titled “Managing Supply-Chain Risks Through Insurance.”

Appointments & Promotions

Stacy RC Berliner named Co-Chair of the firm’s Insurance Recovery Practice in January 2021.

Stacy RC Berliner named Co-Chair of the Insurance Law Section of the Cleveland Metropolitan Bar Association.

Joseph K. Cole selected to serve on the Screening Committee of the Ohio State Bar Association Council of Delegates for 2021-2022.

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Your 2020 Newsletter from Brouse McDowell

Amanda M. Leffler, Lucas M. Blower

It goes without saying that 2020 has been filled with substantial change, rampant uncertainty, and unexpected challenges for nearly every one of our clients and friends. Like all of you, our firm has seen first-hand the wide-ranging effects of the COVID-19 pandemic on businesses. Together with the movement to fight social injustice and the impact of the presidential election, 2020 will unquestionably have a lasting and historic effect on our economy, in both the short and long-term.

The insurance market, likewise, has not been immune to the “new normal.” Insurers and policyholders affected by the pandemic have been litigating throughout the year over whether there is insurance coverage when an entire economy shuts down. Amanda M. Leffler, in her article Insurance Coverage for Losses and Claims Arising from COVID-19, discusses these cases and the prospect for policyholders recovering under their property, liability, and other policies.

We expect that many of these issues will be resolved in 2021 at the earliest. This uncertainty is just one of the factors contributing to a hardening insurance market. In her article What to Expect When you are Renewing, Stacy RC Berliner addresses these changes in the market and shares practical tips for your next renewal.

Meagan L. Moore, in her article Contaminants of Emerging Concern and Insurance Coverage, addresses an issue that will become potentially more prominent in a Democratic administration. She discusses coverage for environmental liabilities arising out of historically unregulated constituents not previously classified as hazardous under federal or state laws.

Of course, even in times of change, some things are constant. And, in 2020, like in other years, insurance claims, particularly large insurance claims, were denied with some frequency without evident or appropriate regard by insurers for their merit. In articles written by Andrew W. Miller, P. Wesley Lambert, Jodi Spencer Johnson, Lucas M. Blower, and Paul A. Rose, we discuss significant decisions rendered by courts—both in Ohio and nationally—where policyholders have prevailed against insurers that have wrongfully denied valid claims.

As we look forward to the next year, we expect that many of these issues will continue to arise in disputes between insurers and their policyholders. The attorneys at Brouse McDowell, as always, are committed to both informing and protecting policyholders in Ohio and throughout the nation.

It is our sincere hope that you find this newsletter useful.

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Insurance Coverage for Losses and Claims Arising From COVID-19

Amanda M. Leffler

COVID-19 has impacted nearly every aspect of our lives, resulting in catastrophic losses and prospective liability for businesses of every size across the globe. Over the past nine months, our firm has counseled clients, brokers, and friends, helping them navigate the complex world of insurance to answer the question keeping them up at night: is my business going to be covered for all of this?

As with nearly any insurance claim, the answer to that simple question depends on the specific language of your insurance policy and the unique facts applicable to your claim. Some trends have developed since the pandemic began, however, and new issues continue to emerge as employees head back to the office and stakeholders consider ways to recoup their own losses. These trends and issues are discussed below.

Business Interruption Insurance

By this point, nearly everyone has heard of business interruption insurance—the first-party coverage that is provided with some, but not all, property policies. This insurance is designed to indemnify the insured for lost profits when its business is unable to operate as a result of an unforeseen event. When the pandemic forced countless businesses to close their doors or severely restrict their operations, numerous insureds turned to their insurers for relief. In virtually every case, though, the insurers denied these claims.

Insurers identified several bases for their denials: (1) that the policy only covers damage to, or destruction of property, which doesn’t exist in the context of coronavirus claims; (2) that, even if property damage exists, it didn’t cause the insured’s loss of income (i.e., the insured didn’t close because of property damage, but to limit the spread of the virus); and (3) that viral/bacterial exclusions preclude coverage in any event. In response, thousands of insureds in nearly every state filed lawsuits against the insurers. The insureds noted that there are multiple cases which have found coverage under similar circumstances, i.e., cases where courts have held that property can sustain “physical damage” even if it hasn’t suffered “structural alteration.”

Only a handful of these cases have been decided. While most cases remain pending, several trial courts have dismissed claims, generally on the grounds that the insured failed to plead that it suffered any “direct loss or damage” to the insured premises. These dismissals have made one thing clear—hiring experienced insurance counsel is critical. Many sophisticated insurance commentators agree that at least some of these cases would not have been dismissed if they had been pled to more clearly fall within the coverage of the policy. Of course, these cases are subject to appeal and, more recently, we’ve seen a handful of trial courts affirmatively deny insurers’ attempts to avoid their coverage obligations for business income losses. Simply put, we are quite early in the development of the case law on coverage for COVID-19 losses, and whether there will generally be coverage for these losses remains undecided in every jurisdiction.

In addition to the litigation, we have also seen numerous states, and even Congress, begin to consider legislation that would address the catastrophic losses suffered by businesses. Some states have proposed laws that would retroactively invalidate viral exclusions that are found in many (but not all) policies. Some have proposed laws that would require the phrase “physical loss or damage” to be construed in a manner that would require coverage. Most have limited their application only to businesses with one hundred or less employees. And the federal government has begun to consider a federally-backed insurance program for future pandemics, similar to flood or terrorism insurance.

Insurers, for their part, have asserted that any attempt to retroactively modify existing policies would result in constitutional challenges and yet more litigation. As of the date of this article, no such legislation has been passed and its future is, again, uncertain.

Other First-Party Coverages

Communicable Disease. Some insureds carry Communicable Disease coverage, usually written as an additional coverage or endorsement on their property policy. This coverage generally applies where there has been an order of a public health authority (or in some policies, direct loss or damage) that requires an insured location to be evacuated, decontaminated, or disinfected due to an outbreak of a disease or virus. It covers both the cost of any decontamination and, often, business interruption losses as well, though usually both coverages are subject to significantly lower sub-limits. While at first blush, Communicable Disease coverage would clearly seem to apply to COVID-19 losses, and some claims have indeed been paid, insurers have been denying other claims where the insured has not demonstrated an actual outbreak at their premises. Insureds contend that the virus was, in fact, everywhere where people congregated—a fact confirmed by state governors when they passed stay-at-home orders, and even by the Pennsylvania Supreme Court in upholding that state’s order.

Event Cancellation. Insureds with Event Cancellation insurance also sought coverage for pandemic-related cancellations of sporting events, concerts, and more. These policies generally cover at least some lost revenues and out-of-pocket expenses, and may include communicable diseases or pandemics as covered causes of loss. However, some insurers have denied claims on the grounds that coverage is not triggered if an organizer cancelled an event merely due to fear of the virus in the community.

Pollution. Pollution policies provide coverage for clean-up costs and, sometimes, business interruption losses when there has been a pollution event. While policy wording varies, a pollution event may include the dispersal or discharge of a virus, rendering an insurer responsible for resulting losses. Even when acknowledging a pollution event, however, some insurers have denied COVID-19-related claims on the basis that the losses were not related to the discharge of pollutants (i.e., the virus), but rather the result of governmental shut-downs that were prophylactic in nature.

Third-Party, Liability Coverages

General Liability. As restrictive governmental orders were lifted, allowing businesses to reopen, many questioned their liability exposure if customers, vendors, or others were to become infected. Early in the pandemic, Princess Cruise Lines was sued for failing to take precautions to prevent an outbreak after two passengers on the previous sailing ship reported symptoms. Generally though, we have not yet seen an avalanche of customer claims. In part, this may be because it would be extraordinarily difficult to prove that someone became infected at a particular location, a necessary element of any negligence case. Further, some states, such as Ohio, have enacted laws to shield organizations from liability except in extreme circumstances.

To the extent such claims are made, however, coverage prospects appear quite good—at least for policies issued before the pandemic that don’t contain a viral or communicable disease exclusion. General liability policies cover an insured’s legal liability for damages arising from bodily injury, so long as it was caused by an accident. While insurers may argue standard-form pollution exclusions preclude coverage for viral injuries, there is little in the policy language or its history of development that would support that argument. That said, insurers are more likely to insist on the inclusion of communicable disease or viral exclusions for policy renewals going forward.

Directors & Officers Insurance. Shareholders may bring lawsuits where the actions or inaction of a company’s directors and officers have caused the company loss—i.e., the failure to develop a contingency plan or the failure to disclose risks posed to financial performance. Several such suits have been filed in the wake of the pandemic. While D&O coverage is incredibly broad for individual insureds—generally covering all allegations of acts, errors, omissions, or misstatements—policies generally include an exclusion for bodily injury. The precise wording of the exclusion varies—while some policies preclude coverage for any claim relating in any way to bodily injury, others do not preclude coverage for the economic damage suffered by others (i.e., shareholders).

Employment Practices Liability Insurance. COVID-19 has created unique workplace challenges for employers. For example, can companies require their employees to travel to affected areas for work? Can companies terminate employees that refuse to come to work or insist on working from home? While EPLI coverage provides protection against employee claims of wrongful termination and similar claims, some coverages are limited. For example, most policies exclude coverage for violations of OSHA or FMLA (except for retaliation). Most exclude, or limit, coverage for wage and hour claims and FLSA violations. Because these types of claims are more likely in the context of the pandemic, insureds should carefully review their policies to identify prospective coverages.

Conclusion

Brouse McDowell will continue to update our clients and friends as these issues develop. You can read all our coronavirus-related updates on our webpage. In the interim, we are assisting our policyholder clients in analyzing their policies and potential claims arising from this pandemic, and we encourage policyholders to carefully review their policies to determine if coverage is available to them.

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“Late” Notice? Remain Calm; All May Be Well.

Andrew W. Miller

Everyone has heard a late notice story. There is a loss; and there is insurance that potentially covers that loss. But for reasons that make sense at the time, the policyholder does not immediately provide notice to the insurer. Maybe the policyholder did not know that coverage was available for the loss; maybe the policyholder wanted to get more information about the loss before submitting; or maybe the policyholder’s dog ran away. The possible reasons are endless.

But “late” notice happens. And when it does, insurers are quick to point out that their policy requires the policy-holder to provide “prompt” or “timely” notice. But in Ohio, the validity of the insurers’ late notice defense is subject to a two-part inquiry:

Did the policyholder breach the insurance policy by failing to provide notice “with-in a reasonable time in light of all the surrounding facts and circumstances;” and

If the policyholder did breach the policy’s notice provision, did that breach prejudice the insurer?

See Ferrando v. Auto-Owners Mut. Ins. Co., 98 Ohio St.3d 186 (2002). If the answer to either inquiry is no, then the insurers’ late notice defense fails.

Recently, in LTF 55 Properties, LTD v. Charter Oak Fire Ins. Co., No. CV18905321, 2020-Ohio-4294 (8th Dist. Sept. 3), an insurer asked the Ohio Court of Appeals to turn the long-standing two-part inquiry on its head, seeking a holding that “delays predicated on expediency or self-interest are per se unreasonable.”

LTF owned a commercial property in Cleveland. It rented part of the property to Garda Arch Fab, LLC, with which it had some overlap in management. NEO Contractors also rented portions of the property from LTF, but those en-tities were not related.

Profac, Inc. contracted with LTF and Garda to operate LTF’s property and agreed that, at some point in the future, it would buy out those entities. In connection with its agreement to operate LTF and Garda and the eventual buy-out, Profac insured the property through Charter Oak, listing both LTF and Garda as additional named insureds.

A fire broke out at LTF’s property on October 19, 2016. Ultimately, the origin of the fire was determined to be a NEO-owned truck stored at the property. Following the fire, NEO notified Grange (its insurer) of the potential claim. LTF and Garda sent notice to Profac and inquired about providing notice to Charter Oak. Profac’s president responded by saying that it would handle the claim, that Profac had notified the agent who secured the policy with Charter Oak, and that LTF and Garda were to take no further action regarding the potential insurance claim.

Approximately one month after the fire, LTF and Garda accepted $100,000 from NEO’s insurer Grange and fully released NEO and Grange from any claims regarding the fire. But in January 2017, LTF and Garda determined that the $100,000 was insufficient to repair the fire damage. However, LTF and Garda still did not provide notice to Charter Oak, as by this time the deal with Profac had soured and the parties were negotiating the terms of their “business divorce.”

Finally, in March of 2017, LTF and Garda provided notice of the fire to Charter Oak, along with a proof of loss for over $350,000, the unreimbursed portion of their loss. Charter Oak denied LTF and Garda’s claim, taking the position that the five-month delay in providing notice was unreasonable and had prejudiced its ability to investigate the loss. LTF and Garda filed suit, but the court granted summary judgment in Charter Oak’s favor on the lack of notice issue, finding that the delay was “unreasonable and deliberate” and that the delay had prejudiced the insurer. Garda and LTF appealed.

On appeal, Charter Oak focused on the circumstances surrounding the late notice. Charter Oak took exception to the reason for the five-month delay: LTF and Garda’s commercial interest in not souring their pending deal with Profac. Charter Oak’s position was that because the reason for the delay was commercial self-interest, the delay was per se unreasonable.

But the court took issue with Charter Oak’s attempts to invoke a per se rule regarding delay. First, the court noted that Charter Oak had the burden to demonstrate that there were no issues of material fact regarding the reasona-bleness of the delay. While the court conceded “the circumstances of [LTF and Garda’s] notice appear to be undisputed,” that does not mean that there is no factual dispute regarding the reasonableness of the delay. And here, there were facts that might make the delay reasonable, including LTF’s and Garda’s belief that the $100,000 payment from Grange was sufficient to restore the property, the president of Profac’s statement that Profac would handle the loss, and his statement that he had already reported the fire to the applicable insurance agent.

So, what are the takeaways?

• First and foremost, a policyholder should treat notice like voting in Chicago in the 1960s: give notice early and give notice often.
• Second, if you are going to insure multiple companies with different owners and managers, you should have a clear understanding of all parties’ rights and responsibilities. LTF and Garda could have avoided litigation if Charter Oak was notified when those entities provided notice to Profac. Post-loss responsibilities among the companies insured by Charter Oak could have – and perhaps should have – been set forth in an agreement among them.
• Finally, if the insured says your notice is “late,” it is the beginning of the inquiry, not the end. Whether that notice was late for some benign reason or even if it was late because you were protecting your economic interest, all is not lost. The question is not “why was it late” but instead “no matter why, was it reasonable?”

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Year in Review: 2020 Non-COVID Related Decisions from Across the Country

Jodi Spencer Johnson

The pandemic rendered 2020 an unprecedented year for the country. COVID-19 quickly became the dominant focus of our businesses, the news, and our lives. Despite the universal distraction that COVID presented, companies and courts alike found a way to conduct business as usual, resulting in several notable decisions on coverage issues this year that you may have missed amidst the COVID fog.

Montrose v. Superior Court, 260 Cal. Rptr. 3d 822 (2020)

One of the most notable decisions this year came out of the California Supreme Court and addressed the hotly disputed issue of whether a policyholder is entitled to spike a single tower of primary and excess coverage, i.e., “vertical exhaustion,” or whether the policyholder must first exhaust all primary policies before seeking coverage under its excess layers, i.e., “horizontal exhaustion,” when multiple years of coverage are triggered by continuous losses. In Montrose Chemical Corp. of California v. Superior Court of Los Angeles County, the California Supreme Court applied the “vertical exhaustion” rule, reasoning that the burden of spreading multi-year losses should be on the insurers and not the policyholder. Although every coverage case is different based on the facts and terms of the policies, the Montrose decision is considered a win for policyholders who otherwise face effectively forfeiting their coverage due to high retentions or gaps often present at the primary level.

West Bend Mutual Insurance v. Krishna Schaumberg Tan, Inc., 2020 IL App (1st) 191834 (March 20, 2020)

In today’s hyper-connected world, privacy claims continue to dominate the courts. Earlier this year, an Illinois appeals court required West Bend Mutual to defend a class action brought against the insured tanning salon under Illinois’ Biometric Information Privacy Act. The salon’s general liability policy required West Bend to defend it against claims stemming from the publication of material that violated an individual’s privacy rights. The issue in this case was whether the tanning salon’s disclosure of its customers’ fingerprints to a single third-party vendor met the publication requirement of the policy. West Bend argued that the term required disclosure of information to the public at large, but the trial court and appellate court both disagreed, ruling that a publication can be found where data is shared only with one person, giving rise to a potential of coverage under the policy and requiring West Bend to defend. The West Bend case constitutes another victory for policyholders amidst the conflicting decisions across the country on what constitutes publication.

Charter Oak Fire Ins. Co. v. Zurich American Ins. Co., No. 19-cv-4212, 2020 WL 1989399 (S.D.N.Y. April 27, 2020)

A recent decision out of a New York federal court is among the first to interpret a 2013 addition to ISO’s additional insured endorsement which provides that the coverage afforded to the additional insured “will not be broader” than that which the contractor was required to provide by contract. In this case, Charter Oak issued a CGL policy to a building owner, which also was insured under an additional insured endorsement issued to an elevator contractor. Charter Oak argued that Zurich was primarily responsible to defend the lawsuit, but Zurich relied on the “will not be broader” language in the endorsement to argue otherwise. The New York court ruled that the phrase refers to the contract between the building owner and contractor, which required the contractor to extend coverage to the building owner for any claims caused “in whole or in part” by the contractor’s negligence. Because such negligence was alleged in the underlying case, Zurich was required to defend. The decision serves as another reminder to construction policyholders to carefully draft and review their contracts as they relate to additional insured coverage.

G&G Oil Co. of Indiana v. Continental Western Ins. Co., 145 N.E.2d 842 (Ind. Ct. App. 2020)

A ruling this year from the Indiana Court of Appeals concerned an issue of national first impression among appellate courts in the area of cybercrime. In this case, the policyholder was a victim of a ransomware attack leaving its computer servers inaccessible. The policyholder paid four bitcoins ($35,000) in exchange for decryption passwords to regain access. The policyholder subsequently asserted coverage for the payment under the computer fraud section of its crime policy, but the insurer denied coverage. The lower and appellate Indiana courts ruled in favor of the insurer, finding that the bitcoin payments were not the result of fraudulent use of a computer. Rather, the court characterized the crime as theft, as there was no deception involved. Cybercrime policies have been prevalent in the industry for some time, and are widely noted as being written very specifically as to what they cover. Whenever policyholders are purchasing cyber insurance or submitting cyber claims, they are prudent to carefully analyze the coverage provisions and claim facts utilizing team members from their risk, legal, and IT departments, along with an experienced broker, to ensure all risks are addressed and all potentially applicable policies are notified.

Loya Insurance v. Avalos, 63 Tex. Sup. Ct. J. 969 (2020)

In the last of the cases highlighted in this article, the Texas Supreme Court adopted a collusive fraud exception to the state’s eight-corners rule for determining the duty to defend. The eight-corners rule provides that when determining the duty to defend, the court must only consider the four-corners of the policy and the four-corners of the complaint. In fact, within less than two months, the Texas Supreme Court again reaffirmed the eight-corners rule, rejecting an insurer’s attempt to limit the rule to where the insurer agreed to defend “no matter if the allegations of the suit are groundless, false or fraudulent.” State Farm Lloyds v. Richards, Texas Supreme Court Case No. 19-0802. In Avalos, however, the Texas Supreme Court allowed Loya Insurance to introduce outside evidence to prove that one of its policyholders committed fraud to secure coverage of an underlying personal injury suit. The high court found that the insurer had no duty to defend, adopting a “collusive fraud” exception to the eight-corners rule, although it stressed that the exception was narrow, and unless insurers have convincing evidence of fraud discovered early on, they should err on the side of caution and defend.

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A Fixed Attachment Point: Excess Insurer to Pay Long-Tail Claims Exceeding Policy Limits

Lucas M. Blower

In William Powell Co. v. OneBeacon Ins. Co., 1st Dist. Hamilton No. C-190199, 2020-Ohio-5325, Ohio’s First District Court of Appeals held that an excess insurer’s attachment point holds constant, in accordance with the terms of the policy, regardless of whether a policyholder purchases additional primary policies covering a long-tail claim. The court framed the issue as whether a policyholder is required to exhaust its insurance coverage vertically or horizontally.

This framing is impossible to appreciate without first picturing a coverage chart—which is a graph that looks like a series of blocks stacked along an x and y axis. Each block is an insurance policy. The width of the block, running along the x-axis, represents the time the policy was in place; the length of the block, stretching up the y-axis, represents the coverage limits of each policy. The first layer of blocks represents the policyholder’s primary insurance policies. The blocks stacked on top of the primary layer are umbrella and excess policies.

Figure 1. Coverage Chart

Pointing to this picture in Figure 1, excess insurers will sometimes argue that, before a policyholder can recover against the excess policy, it has to collect from all the primary policies that provide coverage. This is called horizontal exhaustion.

Figure 2. Horizontal Exhaustion

Policyholders push back, arguing that they only have to collect from the policies directly underneath the excess policy. This is called vertical exhaustion.

Figure 3. Vertical Exhaustion

Ultimately, though, vertical exhaustion and horizontal exhaustion are dueling approaches to interpreting a coverage chart, not an insurance policy. No excess policy mentions exhaustion—vertical, horizontal, or otherwise. Instead, excess policies normally say something to the effect that they will pay losses that exceed the limits of “underlying insurance.” The total underlying limits of an excess policy is referred to as that policy’s “attachment point”—i.e., the point at which the excess policy begins paying.

Returning to the coverage chart, the attachment point is the line where the excess policy rests on top of an underlying insurance policy. Horizontal exhaustion, in effect, is an attempt to raise this line.

Take as an example an excess policy with an attachment point of $1 million. In the normal course, that excess policy will pay the next dollar of liability over $1 million, plus every dollar after that, up to the excess policy’s limit. But, if the policyholder is required to horizontally exhaust its coverage, then the next dollar of liability is not paid by the excess policy. It is paid, instead, by the next primary policy. So, in essence, the attachment point of the excess policy is no longer $1 million. It is $1 million plus the combined limits of every underlying policy that might be triggered by a long-tail claim.

There is nothing in the language of most excess policies, however, that would permit an insurer to raise its attachment point. The court in William Powell correctly held that excess insurers are required to pay losses that exceed the limits of underlying policies covering the same policy periods as the excess policy. This holding is helpful to policyholders, who can rely on it to press excess insurers to pay more quickly for long-tail claims spanning multiple policy periods.

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Contaminants of Emerging Concern and Insurance Coverage

Meagan L. Moore

There is general familiarity with some chemicals and the risks these chemicals pose to human health and the environment. If trichloroethylene (TCE) is present in soil or groundwater at a former industrial site, the potential risks of exposure and associated liabilities are commonly understood.

TCE, along with vinyl chloride and dioxin, are just three examples of common chemicals regulated under federal and state environmental laws. But, have you ever heard of PFAS (per- and polyfluoroalky substances) or 1, 4 dioxane? PFAS and 1, 4 dioxane are examples of contaminants of emerging concern, or “emerging contaminants.” While neither of these two chemicals are “new,” they are part of a class of chemicals that had historically been unregulated, and not classified as “hazardous” under federal or state laws. However, as knowledge of the health risks associated with contaminants of emerging concern develops, so has federal and state regulation. With the increase in regulation, policyholders and their advisors should understand what contaminants of emerging concern are and be aware of the types of insurance coverage that might be available for the costs of investigating or remediating an environmental impact caused by these contaminants and to cover potential third-party claims.

What are emerging contaminants?

Contaminants of emerging concern form a broad category of chemicals or materials that are characterized by a perceived, potential, or real threat to human health or the environment, or by a lack of published health standards. These chemicals or materials are generally widespread, persistent in the environment, and generally not regulated. Many chemicals and materials considered to be a contaminant of emerging concern have been in use for decades, yet the health risks of such chemicals or materials are only now becoming known.

The group of contaminants of emerging concern currently receiving the most attention are PFAS, a family of nearly 5,000 man-made chemicals. PFAS have been extensively manufactured and used worldwide since the 1950s. These chemicals have unique physical and chemical properties that include repelling water, acting as a surfactant, and repelling oil. PFAS have been used in food packaging, household products such as water and stain repellent fabrics, non-stick products, waxes, paints, and even certain firefighting foams. There has been an increase in regulations of PFAS, particularly related to drinking water standards.

Another contaminant of emerging concern that is seeing increased regulation is 1,4-dioxane, a synthetic industrial chemical used as a stabilizer in certain chlorinated solvents. The chemical 1,4-dioxane is likely found at many sites contaminated with certain chlorinated substances because of its widespread use as a stabilizer for solvents. According to the U.S. EPA, as of 2016 1,4-dioxane has been identified at more than thirty-four National Priority List (NPL) sites and presumed to be present, but not tested for, at additional sites.

Pesticides (such as Glyphosate), pharmaceuticals, nanomaterials, perchlorate, and brominated flame retardants (BFRs) are also contaminants of emerging concern. All these contaminants of emerging concern pose a risk to human health and the environment. Although there is little regulation of these contaminants, the federal government is beginning to implement guidance and regulations that require monitoring and remediation of some of them under existing regulations such as Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), The Resource Conservation and Recovery Act (RCRA), and the Safe Drinking Water Act. Many states are moving to regulate PFAS substances as well. Both Michigan and New Jersey have enacted rules creating some of the nation’s most comprehensive and strictest regulations setting standards for PFAS in drinking water. Ohio has developed an action plan to address this as well, however, without enacting any standards of its own. As this shows, regulation is not widespread on a national scale, so there are different requirements depending on location.

Policyholder considerations

Environmental liabilities related to contamination caused by a contaminant of emerging concern may arise under various circumstances. A policyholder could place itself in the chain of title by acquiring property that might have the potential for soil or groundwater contamination and become a potentially responsible party for the environmental impacts at the site. A policyholder could face liabilities for environmental conditions related to its use or disposal of products that may contain or be a contaminant of emerging concern. The bulk of enforcement, whether it be third-party litigation or government investigations, has been directed at product manufacturers. Since there was no regulation of contaminants of emerging concern historically, when manufacturers used them, they were typically not treated prior to being discharged into a water body, often emitted directly into the air, or disposed of at a landfill not adequate to protect against the release, creating a long list of potential environmental liabilities.

Regardless of the particular circumstance of the policyholder, careful scrutiny is required to determine whether there is insurance coverage available.

Types of coverage that might be available

Potential coverage for environmental impacts related to contaminants of emerging concern could exist under comprehensive general liability policies or pollution legal liability (PLL)insurance. The type of insurance needed to cover liabilities related to contaminants of emerging concern will differ depending on the situation. If an insurer is currently manufacturing or selling products that contain such a contaminant, a thorough evaluation of available policies and potential risk exposures will need to be done to ensure risks of liability from a government-ordered investigation or third-party claim are covered. The policyholder should understand what the contaminant of emerging concern at the property is and the timeframe in which the damage to the property occurred. Once there is an understanding of the potential exposure risks, the next step is to assess the types of insurance coverage available. Performing a historical analysis of the policies available will allow the policyholder to determine whether there could be coverage under a CGL policy that does not contain a pollution exclusion (pre-1985 policy). This type of analysis will also assist in determining if PLL insurance should be considered. A PLL policy could offer more comprehensive coverage, especially since the risks associated with contaminants of emerging concern are still developing and there is limited regulation, therefore, there is less of a chance of a specific exclusion being included in the policy. A PLL policy can manage pollution liability risks associated with on- and off-site remediation expenses and third-party liabilities, as well as known pollution conditions in contaminated property transfers.

Takeaways:

1. Know which contaminants of emerging concern might affect you;
2. Evaluate both current and historic coverage available; and
3. Consider adding a pollution legal liability policy to cover certain risks, especially for property transfers.

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Ohio Court Recognizes Coverage for Opioid Claims

Paul A. Rose

Widespread addiction to opioid medications has led to a national health crisis. Governmental entities, such as states, cities, and counties, have incurred enormous costs in dealing with this crisis, including costs for medical response, intervention, and treatment. These governmental entities have asserted claims for these costs against companies in the stream of commerce for these medications, including manufacturers, wholesalers, distributors, and pharmacies. Huge settlements and verdicts have resulted from governmental lawsuits over these claims, some in the hundreds of millions or billions of dollars.

The companies sued in these cases have looked to their general liability insurers for defense and indemnity. Insurers, however, much as they did in response to earlier waves of expensive liability claims—such as asbestos or environmental claims—typically have denied the claims, at times without any apparent regard for the claim merits. Coverage litigation has ensued nationally. Courts are beginning to weigh in on the coverage issues, although there have been very few decisions to date from appellate courts.

In June of this year, Ohio’s First Appellate District, deciding a case from Hamilton County, weighed in on two significant opioid claim coverage issues, deciding both in favor of the policyholder, a pharmaceutical wholesaler. In Acuity v. Masters Pharmaceutical, Inc., C-190176, 2020-Ohio-3440, the court reversed a trial court decision in favor of the insurer. The appellate court rejected the insurer’s arguments that defense coverage under the subject policies was barred because (1) governmental expenses in the nature of economic loss were not covered and (2) the “prior-known-loss” provision in the policies operated to bar coverage. Brouse McDowell represented the policyholder in the appeal.

In regard to the insurer’s “economic loss” argument, the court noted that the policies at issue required a defense of claims for legal liability “because of bodily injury” and that “bodily injury” was defined to include “bodily injury, sickness, or disease.” The policies also expressly covered damages “claimed by any person or organization … resulting at any time from the bodily injury.” The court held, therefore, that “the policies expressly provide for a defense where organizations [such as governmental entities] claim economic damages, as long as the damages occurred because of bodily injury.” The court noted that the underlying governmental claims included claims for “medical expenses and treatment costs.” The court also noted that the governmental entities were not seeking bodily injury damages on behalf of their citizens, but this did not matter. As the court noted, “the governmental entities [were] seeking their own economic losses ….”

Regarding the insurer’s “prior known loss argument,” the court considered policy language that barred coverage when the policyholder “knew, prior to the policy period, that the bodily injury … occurred ….” The court stated, “The underlying suits claim that an opioid epidemic existed prior to 2010,” which was the inception year of the first policy at issue. The court, however, declined to equate knowledge of an opioid epidemic, if such knowledge existed, with knowledge of the specific bodily injuries involved in the underlying governmental lawsuits. In ruling in favor of the policyholder and finding defense coverage, the court reasoned as follows: “We agree that [the policyholder] may have been aware there was a risk that if it filled suspicious orders, diversion of its products could contribute to the opioid epidemic, thus causing damages to the governmental entities. But, we hold that mere knowledge of this risk is not enough to bar coverage under the loss-in-progress provision.”

At present, therefore, policyholders in Ohio asserting coverage for opioid liability claims can cite to a very favorable precedent. As the law on these issues develops nationally, policyholders across the country can do so as well. At the time of this writing, the insurer in this Ohio case is seeking review of the appellate court’s decision by the Ohio Supreme Court. If the Supreme Court should accept the case, there may be a further determination on these issues.

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Ohio Supreme Court Preserves Policyholder Allocation Rights

Paul A. Rose

For insurance coverage claims that span multiple policy periods, sometimes referred to as “long- tail” claims, Ohio law, for decades, has permitted policyholders to pick and choose from among the triggered coverage periods, obtaining their insurance recoveries from the policy or policies of their choice. This right is referred to by many names, including “pick-and-choose,” “joint-and-several insurance liability,” and “all sums” coverage.

In April of this year, the Ohio Supreme Court, in Lubrizol Advanced Materials, Inc. v. National Union Fire Insurance Co. of Pittsburgh, P.A., Slip Op No. 2020-Ohio-1579, considered this right in the context of general liability policy language that provides coverage for “those sums” for which policyholders are legally liable, as opposed to “all sums” for which policyholders are legally liable. The Court recognized the right of policyholders to pick and choose their coverage for long-tail claims under policies containing “those sums” language, just as the Court earlier had recognized that right under policies containing “all sums” language.

This right is exceptionally valuable for policyholders relying upon Ohio law. It may permit policyholders to obtain full recoveries for long-tail claims when they lack coverage in one or more triggered periods because of insurer insolvency, policy exhaustion, problematic exclusions, or many other reasons. In such cases, policyholders can simply choose their best coverage year or years and allocate their claims to that year or those years. For policyholders, this allocation approach is far superior to the approach advocated by insurers, which requires long-tail claims to be pro-rated among all triggered years, leaving policyholders uninsured to the extent claims are allocated to years in which there is no effective coverage. States around the county are split on this issue, with a substantial minority of jurisdictions adopting the insurers’ pro-rata allocation approach.

The Supreme Court of Ohio first adopted the “all sums” or “pick-and-choose” allocation approach in 2002 in Goodyear Tire & Rubber Company v. Aetna Casualty & Surety Co., 769 N.E.2d 835 (Ohio 2002), an environmental insurance recovery case in which Brouse McDowell represented the policyholder. The Court then confirmed Ohio’s application of this allocation approach in 2010 in Pennsylvania General Insurance Company v. Park-Ohio Industries, 126 Ohio St.3d 98, 2010-Ohio2745, an asbestos insurance recovery case in which no policyholder participated but Brouse McDowell advocated policyholders’ interests through an amicus curiae brief filed on behalf of many Ohio-related companies. Both cases, however, concerned coverage grants that contained the “all sums” phrasing, rather than the “those sums” phrasing.

The Lubrizol Advanced Materials case decided earlier this year concerned losses arising from Lubrizol Advanced Materials supplying of allegedly defective resin that was incorporated into pipe that failed in many applications and locations over an extended period of time. Brouse McDowell represented amicus curiae parties supporting the policyholder’s position. The insurers asked the Court to adopt a pro-rata allocation approach, rather than the pick-and-choose allocation approach the Court had adopted in the Goodyear and Park-Ohio cases, because the policy at issue provided coverage for “those sums” the policyholder was legally obligated to pay, rather than “all sums” the policyholder was legally obligated to pay.

The Court, however, declined to do so, holding instead that in cases which “involve long-term or progressive injury or property damage,” the “all sums” or “pick-and-choose” allocation approach would continue to apply, regardless of whether the coverage grant at issue referenced “all sums” or “those sums.” The Court determined that Lubrizol’s ability to pick and choose the policy from which it would recover would depend upon whether Lubrizol’s claim “involved ongoing, continuous exposure,” which the Court described as “progressive injury.” The Court declined to answer that question in Lubrizol’s particular case, in effect returning the case for ultimate determination to the federal district court that had certified the question to the Ohio Supreme Court.

The Court went on to state that if “harm is discrete, not ongoing or continuous,” such that “coverage is triggered at a single, discernible point in time,” then the policyholder will be limited to recovering under the policy in place during that discrete injury. That, however, was not a departure from existing law. The Court, therefore, in effect reaffirmed the vitality of its Goodyear and Park-Ohio precedents, regardless of whether the coverage grant at issue references “all sums” or “those sums.” This is good news for policyholders relying on Ohio law.

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Ohio Court Rules in Policyholder’s Favor on Scope of Pollution Exclusion & Settlement Credits

P. Wesley Lambert

The breadth and applicability of an insurance policy’s pollution exclusion is a frequently litigated, and potentially dispositive, issue in many insurance cases. Similarly, policyholders in claims where multiple insurers’ policies are triggered are also frequently confronted with arguments by non-settling insurers who assert they are entitled to a credit from settlements the policyholder reaches with other settling insurers. In R.W. Beckett Corp. v. Allianz Glob. Corp. & Spec. SE, No. 1:19-CV-428, 2020 WL 1975788, at *1 (N.D. Ohio Apr. 24, 2020), the United States District Court for the Northern District of Ohio ruled in the policyholder’s favor on both issues.

R.W. Beckett concerned a policyholder’s claim for coverage under its CGL policy for liabilities arising from asbestos claims asserted by furnace repair professionals who claimed to have been exposed to asbestos when servicing furnaces or boilers incorporating gaskets supplied by R.W. Beckett. The defendant insurers asserted that coverage was unavailable because of the policy’s pollution exclusion, which excluded claims “arising out of the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids, or gasses, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water; but this exclusion does not apply if such discharge, dispersal, release, or escape is sudden and accidental.”

After R.W. Beckett reached a settlement with one of the defendants, a non-settling insurer also asserted a right to “settlement credits” resulting from R.W. Beckett’s settlement. This argument was premised upon the assumption that, absent credit for these settlements, R.W. Beckett would receive a “double recovery” if it also recovered under the non-settling insurer’s policies.

The insurer, FFIC, sought to have both the pollution exclusion and settlement credit issues certified to the Ohio Supreme Court, arguing that they were issues of first impression under Ohio law. The Northern District of Ohio declined to certify the issues to the Ohio Supreme Court, and further denied FFIC’s motion for summary judgment, finding that FFIC had failed to demonstrate an absence of material issues of fact as to both issues.

Regarding the pollution exclusion, R.W. Beckett did not dispute that the asbestos exposure arose from a “discharge,” “escape,” or “release.” Nor did R.W. Beckett dispute that asbestos would constitute “toxic chemicals, liquids, or gasses, waste materials or other irritants, contaminants or pollutants.” And, the district court held that even if R.W. Beckett had disputed either of these issues, it would have ruled in FFIC’s favor on both.

Instead, R.W. Beckett contended that the asbestos exposure did not result from a release or discharge into the “atmosphere” because the exposure was confined to the basement or residence in which the furnaces or boilers were located. After surveying various cases addressing the question, the district court held that the term “atmosphere” as used in the policy “is ambiguous with regard to whether it includes the air in a residential basement.” The district court further found that there was no evidence of the parties’ intent to exclude such claims, and that “the court must conclude that the parties intended ‘atmosphere’ to mean the air in the external environment and not the air in a residential basement or otherwise enclosed within a structure.” Thus, the court held that exclusion did “not clearly bar coverage for the asbestos claims underlying this case” and denied FFIC’s motion for summary judgment.

On the question of settlement credits, the district court found that it was an open question as to whether settlement credits would be available to non-settling primary insurers. However, the district court found that it need not certify this question to the Ohio Supreme Court because FFIC failed to carry its summary judgment burden on the doctrine’s applicability. Citing Goodrich Corp. v. Commercial Union Ins. Co., 2008-Ohio-3200, at ¶¶38-39 (a case litigated by Brouse McDowell), the district court held that “to show that settlement credits should be applied, the carrier must prove that the policyholder would receive a double recovery in the absence of settlement credits by demonstrating that the compensation paid by the settling carrier was for the ‘same damages’ underlying the claim against the non-settling insurer.”

Reviewing R.W. Beckett’s settlement with the settling insurers, which encompassed claims for past costs, the district court held that FFIC had failed to show that the remaining claims were for the “same damages” as the settled claims. Specifically, the remaining claims against FFIC concerned payment for ongoing and future asbestos claims. Accordingly, the district court denied FFIC’s motion for summary judgment on this issue.

The decision in R.W. Beckett demonstrates the value in challenging the sufficiency of an insurer’s summary judgment evidence, which often is insufficient to justify a ruling in the insurer’s favor. This decision further underscores how ambiguity in an insurance policy’s language often compels a ruling in the policyholder’s favor, particularly when the language is included within an exclusion.

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What to Expect When You Are Renewing

Stacy RC Berliner

The insurance industry cycles through availability expansion and contraction resulting in either hard or soft markets. There is no dispute we are in a hard market – meaning that we have contracting availability resulting in higher insurance premiums, more strict and scrutinized underwriting criteria, reduced capacity, and less competition among insurance carriers.

In 2019, the market was already tough as a result of increased Catastrophic (CAT) claims (wildfires, tornadoes, flooding, hurricanes, blizzards and earthquakes, etc.), high verdicts, reduced interest rates (preventing insurance companies from increasing their profits by investing in other markets with the premiums), and reinsurance (to spread the risk) becoming more expensive. Now, add the pandemic and the market has hardened even more.

So, in this environment, what should we expect during renewals?

Property

In 2019, due to the increase in CAT claims, we saw increased premiums, more exclusions, more sub-limits, and outright refusals to provide coverage in certain high-risk locations. Those trends continued in 2020. Policyholders, even with good loss history, are seeing double digit increases in premiums, and CAT-exposed losses could see increases of over 50%. Additionally, carriers are issuing non-renewal notices for unprofitable insureds; increasing deductibles; closely scrutinizing buildings that are or were, partially or temporarily unoccupied, due to the pandemic; and attempting to reduce their capacity to less than 100% of the risk.

Employment Practices Liability

The #MeToo Movement evolved from increased sexual harassment claims to equal pay claims. On top of that, COVID and allegations of unsafe work environments (including class actions) means we should expect this market to continue to harden. Rates, retentions, and stand-alone claim-specific policies (like Wage & Hour policies) will likely increase. And, with the workforce coming back, expect increased scrutiny by underwriters on return-to-work plans, Wage & Hour compliance, and implementation of the Department of Labor’s (DOL) new overtime rules.

General and Umbrella Liability

Policyholders should expect additional exclusions: virus, odor, pesticide, sexual molestation, drones, vaping, opioid, marijuana, and wildfires. The shrinking umbrella capacity has led to reduced available limits, increased premiums, reduced capacity, and attempts to transition policies to claims-made.

Automobile

You would think this market would be stabilized with less people on the road in 2020, but commercial automobile losses have actually increased. We should expect underwriters to scrutinize safety programs and encourage the installation of safety technology on commercial vehicles.

Environmental

There is capacity and competition among insurers in this market allowing rates to stabilize for site pollution and contractor pollution coverages. Expect additional underwriting scrutiny and reduced terms for mold, petroleum and chemical operations, and aged industrial sites. Certain sectors may have premium increases and reduced terms: healthcare, redevelopment, and hospitality.

Representations and Warranty Insurance

Finally – some good news. There is significant capacity in this market. The rates are remaining steady; however, many insurers are requiring more time and effort in the due diligence process – specifically as to financials, cyber risk, employment practices, and tax indemnity offerings.

Overall Trends

If you haven’t guessed it yet, nearly every policy will have a COVID/virus related exclusion. Also, technology is transforming the industry. From drones utilized during property walk-throughs and apps streamlining the underwriting and claims process, to automotive safety tracking devices, and the capability to predict damage based upon weather indicators in your area. We should expect this dynamic year to be a catalyst for more technology use in evaluating risk and losses going forward.

What Should I Do?

Hold tight. Markets are cycles, and this will pass. In the meantime, you can bolster your chances at a better renewal by doing the following:

• Review Your Portfolio: Find out where you are missing coverage and may want new products on the market. With a hardening market, you may have less control over the terms and conditions, exclusions, and premiums, but you should always know what is and is not covered under your program.
• Increase Risk Assessment and Management Efforts: Know your losses and loss history and be prepared to discuss with the underwriter how those losses have been addressed by the company. Draft and revise policies and procedures to reduce loss going forward.
• Budget: This will be a tough cycle that will not soften in 2021, so plan ahead.
• Communicate and Retain a Knowledgeable Broker: A good broker, who knows your business, losses, and risks, can identify potential risks and appropriate products available.
• Start Early: The renewal process is likely to take longer. Underwriters are examining more issues, trends, and loss history. And insurers are waiting until the last minute to issue proposals.

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Attorney Highlights

Stacy RC Berliner and P. Wesley Lambert named Co-Chairs of the firm’s Litigation Practice Group in January.

Christopher J. Carney and Andrew W. Miller elected to their first term on the firm’s Executive Committee in January.

Amanda M. Leffler elected as Vice-Chair of the Leadership Akron Board of Directors, and elected to the Greater Akron Chamber Board of Directors.

David Sporar named to The Legal Aid Society of Cleveland’s 2020 “Partners in Justice,” in recognition of his role as an ambassador to his law firm and the legal community in Northeast Ohio.

Joseph K. Cole named a Fellow of the American Bar Foundation in July, and appointed to the Advisory Council on Diversity Initiatives for the Ohio State Bar Association in August.

Kerri L. Keller appointed to the City of Hudson Charter Review Commission for 2020.

Amanda M. Leffler commented on class actions involving pandemic coverage in a Bloomberg Law article.

Paul A. Rose commented on insured’s successful appeal requiring insurer to defend opioid liability suits in a Law360 article.

P. Wesley Lambert issued a video alert and podcast “Policyholders Can Find Support for COVID-19 Business Interruption Claims in Unexpected Places.”

Amanda M. Leffler co-authored a client alert, with Nicholas P. Capotosto and Stephen P. Bond, titled “Necessity is the Mother of Invention – Checklist of Issues to Consider Before Reopening After COVID-19.”

Jodi Spencer Johnson wrote a blog “Ohio Supreme Court Answers What ‘Those Sums’ Means in an ‘All Sums’ World.”

P. Wesley Lambert wrote a client alert “Policyholders Find COVID-19 Property Coverage Ally in Pennsylvania Supreme Court.”

Joseph K. Cole wrote a blog “Ransomware Attack – Is Losing Data Considered a Physical Loss Under Your Insurance Policy?”

For more content from Brouse McDowell’s Insurance Recovery Practice Group, please visit brouse.com/insurance-recovery to see news, blogs, podcasts, client alerts, and upcoming events. Don't forget to check out the recording of our 2020 Insurance Coverage Conference by visiting: bit.ly/2020-IR-Conference and providing an email address for access.

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"I want it noooow!"

Joseph K. Cole & Amy Shock, Hylant

That famous proclamation by Veruca Salt in Willy Wonka and the Chocolate Factory epitomized a spoiled, unrealistic child when the movie was released in 1971. Flash forward nearly 50 years later and no sooner do we conceive of a desired product, it appears on our doorstep.

In an era where everything can be brought to your front door in days or even hours, delivery is king. What does this mean for your operation? How are you adapting? In the rush to stay competitive, are you considering the risks associated with delivery services and the insurance implications of adding these types of services?

Businesses looking to get into the delivery game typically have two choices: (1) in-house delivery; or (2) partnering with a third-party delivery service. There are pros and cons to both options. Below are some considerations to keep in mind while you are trying to adapt to this cultural shift to stay competitive.

In-House Delivery

Depending on your type of business, in-house delivery may range from shipping products over long distances to delivering food locally. This could involve a fleet of company-owned vehicles wrapped with your logo or company employees using their personal vehicles.

One benefit to in-house delivery is that you have greater control over personnel and delivery standards. There are, however, several risk mitigation factors to consider.

• Review your insurance coverage to ensure you have adequate coverage.
• If employees are operating their personal vehicles on behalf of the business:
  • Alert your insurance agent so they can check your policy for coverage to confirm the insurance company is comfortable with this exposure.
  • Notify employees that they must also alert their personal auto insurance company that they will be using their vehicle for deliveries. Many policies specifically exclude food delivery, so the employee must make sure there is coverage. A business owners’ policy would not cover the physical damage to the vehicle in the event of an accident, so it is important for the employee to check with their personal auto insurer for coverage.
• Require each delivery employee to review and sign a “driver safety agreement” that sets forth:
  • what is, or is not, acceptable on their motor vehicle driving record (e.g., types of moving violations that could result in termination); and
  • required safety precautions (e.g., no cell phone use while driving; proper seatbelt use; following traffic laws), along with a mandate that employees report any infractions to you.
• Develop and implement procedures to annually review each driver’s motor vehicle driving record and compare it against the company’s guidelines.
• Develop a standard vehicle inspection checklist to ensure that all vehicles, whether company-owned or employee-owned, are safe for road operation, and review quarterly.

Third-Party Delivery

Well-known examples of third-party delivery services include UberEats, GrubHub, and DoorDash. One benefit to such services is that the business owner does not need to invest in hiring, training, or managing employees. Additionally, there is no need to invest in or maintain a fleet of vehicles. However, before entering into an agreement with a third-party delivery service, you should also consider:

• Who bears the responsibility if, during delivery, there is an accident, a crime committed, or some other unforeseen event?
• What insurance coverage is in place? Similarly, whose insurance coverage applies if such an event occurs?
• If your business involves food delivery, what standards are in place for food handling, and what precautions are taken to ensure the food is the same quality as when it left your restaurant? What happens if the driver takes too long? What happens if they just ate peanuts on the drive and your customer has an allergy?
• How are you protected?
• Understand that you are now sharing your goodwill and brand with someone you have never met. How will they represent you?

Entering into the business of home delivery can be a profitable venture. We also want you to be aware of the potential risks, and how to protect your business and your employees from those risks. You do not need to find the proverbial golden ticket to run a successful delivery business, but having trusted partners can help. 

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Governmental Investigations—Are You Covered?

Author: Christos Georgalis, Flannery Georgalis, LLC (chris@flannerygeorgalis.com)

Introduction

In an increasingly complex and regulated world, scrutiny from governmental agencies and regulators continues to rise. Every day, federal and state governmental agencies issue subpoenas or other investigative demands to companies of all shapes and sizes. Many companies overlook the significant impact these types of events can have on their business operations. If they are not prepared to respond, companies can be disappointed to discover, only after it is too late, that their insurance policies may not cover what are often expensive endeavors.

Have a Plan

• Some of the most significant (and stressful) challenges companies face in responding to a governmental investigation is lack of advanced planning. To be prepared when served with a subpoena or other investigative demand, companies should have considered at least the following:
• Which attorney or law firm they will contact. In many instances, investigations move very quickly, so it is critical to involve an experienced law firm immediately.
• What data backup systems are in place. Companies should ensure that they have a data backup system in place so their organization can continue operating, even in the face of a subpoena or other investigative demand. Otherwise, companies can encounter lost data, time, and profits.
• What insurance may be available. Failure to provide sufficient notice under applicable insurance policies may result in the denial of coverage, so it is important to engage coverage counsel early in the process to allow them to identify potential insurance coverage and prepare claims submissions. And, as discussed below, there are many insurance coverage issues that an organization should consider before filing a claim.

Know What You Have

After a plan of action is in place, an organization should turn to improving its protections. An important step is to review and assess whether certain governmental actions — especially those most likely to occur in the organization’s particular industry — will trigger insurance coverage under current policies. For instance, a broker-dealer firm must be prepared to receive demands from the Securities and Exchange Commission, Financial Industry Regulatory Authority, or even state regulators; while companies in the health care sector must be prepared to receive Civil Investigative Demands and HHS-OIG subpoenas, and respond to Medicaid audits.

Many governmental investigations are initiated by issuance of a regulatory subpoena, civil investigative demand, grand jury subpoena, or target letter. When an organization receives one of these investigatory demands, a determination must be made as to whether the demand amounts to a “claim” under any applicable insurance policy. The definition of a “claim” is specific to each insurance policy and must be analyzed carefully to determine whether coverage exists. Oftentimes, for a claim to be valid, it must be made: (1) during the applicable policy period; (2) against an insured person or the insured organization; and (3) for wrongful acts.

While a governmental demand may at first glance seem to present a “claim,” under most policies, the demand must also target the organization for a “wrongful act”: the insured must be the entity under investigation. For instance, if the company or its employees are designated as witnesses or even victims of another’s malfeasance, in contrast with being designated as the perpetrator of the malfeasance, then there may be no “claim” triggering insurance coverage. Whether an entity itself is under investigation, however, is not always known. Governmental agencies may be unwilling to provide this information during the course of their investigation. Furthermore, how a governmental agency perceives a company at the beginning of an investigation may change multiple times over the course of an investigation. Coverage counsel can assist an organization in analyzing the demand and framing the insurance claim.

It is also important to be mindful of the policies’ numerous exclusions, including professional services and regulatory agency exclusions. Typically, if a subpoena relates to the “professional services” of a company, then coverage would be unavailable. But determining what the phrase “professional services” entails can be difficult, as often times it is not defined in the policy.

Similarly, many insurance policies contain a regulatory agency exclusion that precludes coverage for claims brought by a regulatory agency. For example, in the banking industry, claims brought by the Federal Deposit Insurance Corporation against individual directors and officers are typically excluded under the financial organization’s Director’s and Officer’s Liability policy. It is important for an entity to be aware of similar exclusions that may be applicable to the regulatory agency providing oversight in its field.

Companies are well advised to talk through exclusion issues with their insurance counsel and brokers to understand how these exclusions may apply.

Leave It to the Pros

Coverage counsel is not only beneficial from the inception of an investigation, but also throughout the investigation process. From assessing and submitting the company’s potential claim, to advocating on the company’s behalf in the event of insurance company pushback, coverage counsel adds tremendous value. Having coverage counsel involved early can also help the company avoid common mistakes made by organizations, as well as assist in navigating complex insurance policies.

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Three Things Policyholders Should Know About Coverage for Settlements

Jodi Spencer Johnson

All too often policyholders find themselves in a difficult predicament when it comes to resolving a lawsuit. Although their insurer may have been defending the case, it has now drawn the purse strings tight when it comes to settlement. It will point to that long reservation of rights letter sent to the policyholder months or even years ago and explain why it will not contribute with respect to certain portions of any judgment or settlement. Or perhaps the insurer has valued the claim less than what the plaintiff is willing to accept, thus forcing the policyholder to trial. These are some of the murkiest waters we negotiate as coverage attorneys. There are three things policyholders should know about coverage rights and obligations regarding settlements.

1. Recognize the distinction between the duty to defend and duty to indemnify.

First, the duty to defend and the duty to indemnify are different. The duty to defend is broad, and under many policies, if the insurer is obliged to defend any part of the allegations asserted against the policyholder, it must defend the entire case – even claims for which there is no potential for coverage. The duty to indemnify, on the other hand, is narrower. Generally, an insurer may not have to indemnify uncovered loss. Thus, while an insurer may have been defending the case, where the damages are allocable to particular claims, it may not agree to fund the portions allocated to uncovered claims. The facts of each case and the language in the policy at issue can greatly affect the outcome in these cases. Therefore, when negotiating a settlement, care should be taken, and consulting a coverage attorney may be beneficial.

2. Insurers may not place their own interests above the policyholder’s.

Second, insurers typically have the right to settle a claim against their policyholder, but must consider the policyholder’s interests at least equal to their own interests when making settlement decisions. Netzley v. Nationwide Mut. Ins. Co., 34 Ohio App.2d 65 (2nd Dist. Mont. Cty. 1971). Moreover, if an insurer has the opportunity to settle within policy limits, failure to do so could constitute a breach of its duty of good faith and fair dealing and render the insurer liable for any excess judgments to which the policyholder is exposed.

3. Insurers that breach their duty to defend and/or denied coverage may not control settlement.

Third, if the insurer has breached its duty to defend and/or denied coverage, the policyholder is free to enter into a reasonable settlement and still pursue coverage afterwards. The insurer cannot, on the one hand, deny coverage or breach its obligations and then assert coverage defenses based on policy conditions such as the consent to settle or voluntary payment conditions. Sanderson v. Ohio Edison Co., 69 Ohio St.3d 582, 587 (1994) (“Neither the insured nor the injured party is required to perform conditions in a policy made vain and useless by reason of the insurer’s prior breach.”); Ward v. Custom Glass & Frame, Inc., 105 Ohio App.3d 131, 663 N.E.2d 734 (8th Dist.1995). Additionally, even an insurer that has not breached its duty to defend, but that has indicated it will not indemnify the policyholder against a judgment, may be precluded from controlling settlement under the right set of facts. See Ward, supra (holding that “[w]hen an insurance company refuses to provide coverage and at the same time seeks to maintain control of the same litigation, it . . . creates a frustration of purpose. Such conduct would compel a person of reasonable faculties to cut his/her costs and settle a lawsuit to avoid the possibility of a higher judgment.”).

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Attorney Highlights

Kerri L. Keller was appointed to the City of Hudson’s Economic Growth Board.

Alexandra V. Dattilo became a Fellow of the Foundation for the Federal Bar Association.

Jodi Spencer Johnson attended the American Bar Association’s Fall Leadership Meeting in Arizona, October 3-5, 2019. She also spoke at the Women in Litigation CLE hosted by the American Bar Association, November 13-15, 2019.

Amanda M. Leffler, Andrew W. Miller, and Joseph P. Thacker presented on Effectively Managing Your Claims at the Dana In-House Seminar CLE on October 1, 2019.

Joseph K. Cole spoke alongside Craig S. Horbus on Ethical Issues Surrounding Technology at the Dana In-House Seminar CLE on October 1, 2019.

Congratulations to Anastasia J. Wade on the birth of her son Trevor Harrison Yee on July 21, 2019!

Thank you to those who could attend our Annual Insurance Coverage Conference this year! Please save the date for next year on October 22nd at Embassy Suites, Cleveland Rockside.

Check out our podcast series, Insurance Coverage Insights on Apple Podcasts, Google Play, and Spotify, or by visiting: https://www.brouse.com/podcast-insurance-coverage-insights

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#MeToo Liability: Coverage Issues for Employers

Brandi L. Doniere, Kerri L. Keller

The #MeToo movement began to spread on social media in 2017, fueled by the improprieties of Roger Ailes, Harvey Weinstein and others in the public eye that came to light. The flood of allegations against men in powerful positions has encouraged others to come forward with their own stories of workplace harassment. As a result, businesses began to better educate themselves and their employees, managers, and supervisors on what constitutes sexual harassment. Many also worked to tighten policies and procedures. Better education and updated policies notwithstanding, claims of harassment, continue and employers are looking to their insurers to defend them in court and indemnify them for the associated damages and settlements.

As context, workplace harassment is unlawful under state and federal law when an individual is harassed on the basis of his or her gender or other protected status, such as age, race, or religion. Sexual harassment is the most prevalent type of workplace harassment and often consists of unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature. Importantly, the harassment does not need to be sexual and can include offensive remarks about a person’s gender.

Claims of sexual harassment generally fall into two types, both prohibited by federal and state law: quid pro quo and hostile work environment. Quid pro quo harassment occurs when a person who can take formal employment actions (like hiring and firing) is the harasser. For instance, if a supervisor conditioned an employee’s career advancement on sexual favors, the supervisor commits quid pro quo harassment. A hostile work environment occurs when an employee is harassed in a way that unreasonably interferes with the employee’s work performance or subjects him or her to an intimidating or offensive work environment. For a hostile work environment claim, the harasser can be a co-worker, a supervisor, or third-party, such as a contractor, client, or even a customer. Primary liability for sexual misconduct belongs to the wrongdoer, however, employers and supervisors face liability as well.

In addition to bringing claims of sexual harassment and discrimination under state and federal law, an alleged victim may assert a number of common law claims as well. These claims include vicarious liability, negligent hiring, negligent supervision, negligent or intentional infliction of emotional distress, and breach of contract. In fact, employees usually assert as many claims as possible against as many individuals as possible, such as officers, directors, managers and supervisors, along with the employer. Further expanding an employer’s exposure, it may want to defend and indemnify its named employees, or may be obligated to do so under employment contracts. As to officers and directors, the employer’s bylaws may require it to defend and indemnify them for liabilities arising from the operations of the company, which may include the actions of its employees. In sum, an employer may be obligated to defend multiple causes of actions against multiple individuals all arising out of a single incident.

Where should employers look for insurance coverage when faced with claims arising from an employee’s allegations of harassment? An Employment Practice Liability Insurance (EPLI) policy is the most likely source of coverage. EPLI policies cover employers and their directors, officers and senior managers for claims brought by employees alleging wrongful employment acts. Some EPLI policies also cover claims brought by customers, clients and other third-parties.

Directors and Officers (D&O) insurance policies similarly provide coverage for the errors or omissions of a company’s officers and directors, which could include such mismanagement as perpetuating a hostile work environment or permitting employees to engage in improper sexual conduct. The coverage provided by D&O policies, however, is typically narrower than that provided by EPLI policies. D&O policies usually contain exclusions for bodily injury and intentional conduct and may contain an “insured vs. insured” exclusion, which would negate coverage for any claim brought by an employee who is also a director or officer covered by the policy.

In some limited circumstances, an organization’s commercial general liability or umbrella policy may provide coverage. To be covered under a general liability policy, the harassing acts or sexual misconduct must have been neither expected nor intended by the insured. Whether an employer expected the sexual misconduct to occur depends on what the employer knew about the wrongful conduct and the wrongdoer’s propensity to engage in it. But determining that the wrongful conduct is a covered occurrence under a general liability policy does not end the coverage inquiry. General liability policies often contain an employment practices exclusion or sexual misconduct exclusion that negates coverage for sexual harassment, negligent hiring and negligent supervision claims.

If an employer does not have EPLI or D&O coverage and its general liability policy excludes coverage, occasionally these claims are covered by an umbrella policy, which may provide “broader than primary” coverage. However, coverage under an umbrella is often subject to significant self-insured retentions. It will often be an employer’s last resort when seeking coverage for a sexual harassment claim.

The cost of defending a sexual harassment lawsuit is usually quite high, so the employer’s ability to tender the defense to an insurer is very important. Assuming that an employer has one of the policies described above, whether an insurer is obligated to defend an employer depends on the claims and allegations asserted in the complaint. In Ohio, an insurer must defend its insured when the allegations of the complaint arguably or potentially fall within the coverage of the policy. Willoughby Hills v. Cincinnati Ins. Co. (1984), 9 Ohio St.3d 177, 179. An insurer that is required to defend an employer against claims arising from sexual harassment or discrimination may ultimately have no duty to indemnify the employer for damages or settlement paid to the accuser. An insurer’s duty to indemnify an employer depends on the specific facts and circumstances surrounding the misconduct – the same facts and circumstances that will determine the employer’s liability. The following facts and circumstances may be critical to a coverage determination:

- Who is the accuser (employee, contractor, customer, client, or patient)?
- Who is the wrongdoer (employee, contractor, supervisor, director, or employer)?
- Where did the wrongful act(s) allegedly take place?
- When and how often did the wrongful act(s) allegedly take place?
- Was the wrongdoer acting in the scope of his or her employment?
- Should the employer have known that the wrongdoer was engaged in misconduct?
- Did the employer take action to stop the misconduct?

In any sexual harassment or discrimination litigation, the allegations in the complaint and circumstances surrounding the misconduct will be key to determining whether a policy provides defense or indemnity. Every available policy should be reviewed for potential coverage, not only when a sexual harassment or discrimination claim is initially made, but whenever previously unknown facts are disclosed or new causes of action are asserted.

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Additional Insured Coverage for Injuries to Subcontractor's Employee, But Not for Injuries Before Contractor Begins Work

Nicholas J. Kopcho

A common requirement in the construction industry is that subcontractors add general contractors as additional insureds on their general liability insurance policies. By requiring additional insured status, general contractors aim to protect against an injured person’s claim that the general contractor failed to properly supervise the worksite. As the following cases illustrate, being named an additional insured potentially offers a general contractor additional protection if an injury occurs on the worksite, but it does not guaranty coverage in all circumstances.

The Illinois Court of Appeals recently addressed an additional insured’s access to coverage under its subcontractor’s commercial general liability policy in Pekin Ins. Co. v. Twin Shores Mgmt., No. 4-18-0513, 2019 WL 1270513 (Mar. 15, 2019). In Pekin, Twin Shores sought coverage for claims arising from the death of Michael Williams. Mr. Williams, an employee of Henson Electric, suffered a fatal injury when he fell off a ladder during the course of his work. Henson was a subcontractor of Twin Shores, and Mr. Williams’s death occurred during the course of its work on the project.

Pekin insured Henson under a CGL policy that named Twin Shores as an additional insured. The insurance policy covered Twin Shores only for Henson’s negligent acts or omissions for which Twin Shores could be held vicariously liable, not for Twin Shores own negligent acts or omissions in the construction project.

Mr. Williams’s estate brought a tort action against Twin Shores and Henson, accusing Twin Shores of several negligent acts or omissions, including failing to provide scaffolding, a scissor lift and safety equipment. The complaint accused Henson of the same negligent acts or omissions.

Pekin filed a declaratory judgment action seeking a judgment that it had no duty to defend Twin Shores. Pekin argued that because the tort complaint’s factual allegations made no claims of potential vicarious liability against Twin Shores for Henson’s negligence, the policy provided no coverage. The circuit court held Pekin had a duty to defend Twin Shores, and Pekin appealed.

The Illinois Court of Appeals concluded that Pekin had a duty to defend Twin Shores if the underlying complaint alleged: (1) Henson was negligent, and (2) Twin Shores was vicariously liable for Henson’s negligence.

The underlying complaint satisfied the first requirement, as it alleged Henson was negligent. The real issue, then, was whether Twin Shores could be held vicariously liable for Henson’s negligence. Even though the subcontracting agreement identified Henson as an independent contractor, in an attempt to sever any vicarious liability Twin Shores may have, the appellate court found that the contract itself was not dispositive. Instead, the court used the Illinois Supreme Court’s multi-factor test for distinguishing between an independent contractor and an agent.

In applying the test, the appellate court noted that the complaint alleged Twin Shores had significant authority over Henson’s work. This led the appellate court to conclude that Henson was Twin Shores’ agent instead of an independent contractor. And, as an agent instead of an independent contractor, Twin Shores could be vicariously liable for Henson’s torts. For these reasons the circuit court’s judgment was affirmed.

In contrast, a separate case involving additional insureds, Mt. Hawley Ins. Co. v. Zurich Am. Ins. Co., Wash. Ct. App. Div 1. No. 77379-8-I, 2019 WL 1487726 (Apr. 1, 2019), required the court to decide whether Zurich had a duty to defend the companies named as additional insureds on a contractor’s commercial liability policy after a person was injured on the additional insured’s property.

This case did not involve a general contractor and a subcontractor like Pekin, but instead a property, Granite Marketplace, LLC (Granite), and property manager, JSH Properties, Inc. (JSH), who hired a contractor, Fisher & Sons, Inc., d/b/a JTM Construction (JTM), to fix the property’s sidewalk. The agreement’s terms required JTM to provide Granite and JSH with primary insurance coverage as additional insureds on JTM’s commercial liability insurance policy.

Along with being additional insureds, Granite and JSH obtained additional insurance through Mt. Hawley. The Mt. Hawley policy specifically stated it is excess over “other primary insurance available to [Granite and JSH] covering liability for damages arising out of the premises or operations, or the products and completed operations, for which [Granite and JSH] have been added as an additional insured by attachment of an endorsement.”

JTM obtained the necessary permits to begin the sidewalk repair on November 6, 2012, but did not begin any repair work that day. The next day, November 7, 2012, Kim Jennett was injured when her foot became stuck in a sidewalk hole that JTM was to repair in front of Market Place. Jennett filed suit against Granite, JSH, and JTM, alleging that her bodily injuries were caused by their negligence.

Granite and JSH tendered their defense to JTM and, thus, to Zurich. Zurich declined to accept the tender, claiming that because JTM had not yet started work when the incident occurred it was not responsible for the injury, and thus Zurich was not required to defend Granite and JSH as additional insureds. Zurich defended only JTM, while Mt. Hawley defended Granite and JSH.

JTM successfully moved for summary judgment in the Jennett lawsuit, and after JTM’s dismissal Granite and JSH settled the lawsuit. Mt. Hawley paid Granite’s and JSH’s defense and settlement costs. Mt. Hawley then filed suit against Zurich, alleging that Zurich breached its duty to defend and indemnify Granite and JSH in the Jennett lawsuit, and due to the breach Mt. Hawley was entitled to subrogation from Zurich in amounts equaling Zurich’s obligation for Granite’s and JSH’s defense costs, indemnity, or other damages related to the Jennett lawsuit.

Mt. Hawley contends Zurich had a duty to defend Granite and JSH in the Jennett lawsuit because the policy covered claims for injuries if Granite’s and JSH’s liability for the injuries is caused by the acts or omissions of JTM. Granite and JSH argued that JTM’s delay in fixing the sidewalk was an act or omission requiring coverage under the Zurich policy, and that act or omission directly caused Granite and JSH to be found liable for Jennett’s injuries. Zurich asserted that Jennett’s personal injury was not caused by an act or omission of JTM.

After evaluating the parties’ competing insurance contract interpretations, the court held that even if Mt. Hawley was correct about its interpretation, Zurich’s policy did not provide coverage because JTM did not undertake any obligation to complete the sidewalk repair before the day of the incident, and thus it could not possibly have omitted to repair the sidewalk earlier. Hence, Zurich had no duty to defend Granite or JSH because no JTM act or omission caused Jennett’s injuries.

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Crucial Coverage for Advertising Injuries and the Insurer's Broad Duty to Defend

Christopher T. Teodosio

Overlooking coverage for advertising injury can be detrimental to policyholders and their businesses when they receive a cease and desist letter or complaint that touches on marketing activities. Commercial general liability (CGL) insurance policies typically provide coverage for advertising injury “caused by an offense committed in the course of advertising [the policyholder’s] goods, products or services.” We Do Graphics, Inc. v. Mercury Cas. Co., 124 Cal.App.4th 131, 137, 21 Cal.Rptr.3d 9, 12 (Cal.App.2004). An “advertising injury” means an “injury arising out of one or more of the following offenses: (a) Oral or written publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products, or services; (b) Oral or written publication of material that violates a person’s right of privacy; (c) Misappropriation of advertising ideas or style of doing business; or (d) Infringement of copyright, title or slogan. Transcontinental Ins. Co. v. Jim Black & Assoc., Inc., 888 So.2d 671, 677 (Fla.App.2004), aff’d, 932 So.2d 516 (Fla.App.2006). This article will analyze the broad nature of how courts have defined “advertisement” or “advertising idea” for purposes of determining whether the allegations in a complaint trigger coverage or a duty to defend under a CGL policy.

A CGL policy generally defines an advertisement as a “notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters.” See ISO Form CG 00 01 04 13. Radio, television and internet advertisements are obvious examples. Courts, however, have taken an expansive view as to what constitutes an advertisement or an advertising idea when determining whether there is coverage or if an insurer has a duty to defend.

An advertising idea can include concepts as broad as an idea on how to acquire new customers or new business. Indeed, the United States Court of Appeals for the Third Circuit found that an advertising idea is defined as “an idea about the solicitation of business and customers.” Green Mach. Corp. v. Zurich American Ins. Group, 313 F.3d 837, 839 (3d Cir. 2002). Courts have also found that an advertising idea encompasses “ideas in connection with marketing and sales and for the purpose of gaining customers” or “an idea calling for public attention to a product or business especially by proclaiming desirable qualities so as to increase sales or patronage.” CAT Internet Servs., Inc. v. Providence Washington Ins. Co., 333 F.3d 138, 142 (3d Cir. 2003); American Ass’n v. Goregis Ins. Co., 282 F.3d 582, 587 (8th Cir. 2002).

Like their expansive interpretation of an advertising idea, courts have found a broad range of activities are considered advertisements for purposes of an insurer’s duty to defend under a CGL policy, including: the unauthorized use of a marathon runner’s name in advertising a company’s running shoes. Holyoke Mut. Ins. Co. in Salem v. Vibram USA, Inc., 480 Mass. 480, 106 N.E.3d 572 (2018); trademark infringement. Kim Seng Co. v. Great Am. Ins. Co. of New York, 179 Cal.App.4th 186, 1038, 179 Cal.App.4th 1030, 1038, 101 Cal.Rptr.3d 537, 543 (Cal.App.2009), as modified on denial of reh’g (Dec. 7, 2009) (“[I]nfringement could reasonably be considered as one example of a misappropriation, and taking into account that a trademark could reasonably be considered to be part of either an advertising idea or a style of doing business, it would appear objectively reasonable that ‘advertising injury’ coverage could now extend to the infringement of a trademark.”); and attaching a similar hang tag on garments. E.S.Y., Inc. v. Scottsdale Ins. Co., 139 F.Supp.3d 1341, (S.D.Fla.2015).

Because of the broad nature of coverage for an advertising injury, it is important for policyholders to scour the complaint or cease and desist letter when a third-party is alleging infringement on an advertising idea. Furthermore, it is helpful to view the allegations in the complaint or cease and desist letter broadly, based on courts’ interpretation of what can fall into this coverage.

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Attorney Highlights

Joseph K. Cole was appointed to the OSBA Council of Delegates.

Stacy RC Berliner and Andrew W. Miller presented on “Restatement of Law, Liability Insurance and Its Future” at the Cleveland Metropolitan Bar Association on May 30, 2019.

Amanda M. Leffler was a co-presenter on “Emerging Cyber and Computer Coverages and Exclusions,” at the PILC Spring Meeting in Austin, Texas, May 9-10, 2019.

Amanda M. Leffler and P. Wesley Lambert presented with Jim Dixon at a Brouse seminar, “Beware of Gaps in Insurance Coverage in the Wake of Ohio Supreme Court’s Ohio Northern Decision,” on May 7, 2019.

Bridget A. Franklin and Meagan L. Moore celebrated their 10-year anniversary with Brouse McDowell at the firm’s Service Awards Breakfast on April 9, 2019.

Amanda M. Leffler and Andrew W. Miller spoke on “The Exchange - Hedging Your Bet: Going Beyond Insurance When Disaster Strikes” at the Beyond Insurance Conference in Las Vegas, Nevada, March 28 - 29, 2019.

Amanda M. Leffler and P. Wesley Lambert presented on “Insurance Coverage for Defective Construction Claims,” at the Ohio Home Builders Association Spring Meeting in Columbus, Ohio on March 6, 2019.

Brouse McDowell sponsored the ABA’s Litigation Insurance Coverage Committee Seminar in Tucson, Arizona, held February 27-March 2, 2019.

Brandi L. Doniere published an article titled “For Texas Insurers, Liability is Separate from Defense Costs,” for Law360 on February 8, 2019.

Gabrielle T. Kelly published an article titled “Insurance Coverage for Regulatory Penalties Resulting from a Data Breach,” for The Cleveland Metropolitan Bar Journal, February 2019.

Brouse McDowell is a proud sponsor of the Northeast Ohio RIMS Chapter for 2019.

 

Save the Date

7th Annual Insurance Coverage Conference
Thursday, October 10, 2019

Check out our podcast series, Insurance Coverage Insights on Apple Podcasts, Google Play and Spotify, or by visiting: https://www.brouse.com/podcast-insurance-coverage-insights

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Don't Lose on a Technicality: The Policyholder's Playbook on Policy Conditions

Jodi Spencer Johnson

The conditions can be a particularly dangerous part of an insurance policy: they are often overlooked until it’s too late and an otherwise covered claim is rejected because of a condition violation. When a claim arises, the policyholder has a troublesome or even devastating loss on its hands. A building has been lost in a fire, a bodily injury suit has been filed, or the policyholder discovered that a trusted employee has been stealing company funds for years. Navigating the fine print of an insurance policy is the last thing on the policyholder’s mind.

The good news is that, while condition violations can have a preclusive effect on an insurance claim, in most circumstances they do not. Below, we discuss five conditions that policyholders should be familiar with, including tips on best practices to avoid issues with conditions.

1. Notice

As policyholder lawyers, we cannot stress enough the importance of getting notice out to all potentially-applicable insurers as soon as possible. Policyholders may not recover amounts incurred prior to giving notice. And, depending on the applicable state law, late notice can bar coverage entirely.

Almost all policies require that the policyholder send notice “promptly,” “as soon as practicable” or “immediately.” Generally, these terms mean within a reasonable time after a policyholder discovers facts resulting in a potential occurrence. Whether notice is “reasonable” is a question of fact – there are no bright-line rules.¹ Depending on the specific facts, a court may find notice years after the occurrence reasonable or notice very shortly after the occurrence unreasonable. The only universal guideposts are that a policyholder should provide notice (i) as early as possible, (ii) to all known, potentially applicable insurers, including primary, umbrella, and excess insurers, and (iii) to include policies under which the policyholder may be an additional insured.

If a court determines that notice is “late,” – that is, not given within a reasonable time, – the consequences vary. In most jurisdictions, including Ohio, unless the insurer was actually prejudiced by late notice, the claim will not be barred.² What is actual prejudice is a question of fact. Most often, the policyholder has defended itself, and nothing would have changed had the insurer been notified sooner.

While late notice may not bar coverage, however, the policyholder may have a difficult time recovering costs incurred prior to notice, also called “pre-tender costs.” Notably, in some jurisdictions if earlier notice would have been futile or if notice was late because, despite diligently searching, the policyholder was not aware of the existence of the coverage sooner, pre-tender costs may be recovered.³

On the other hand, some jurisdictions do not apply a prejudice standard to late notice issues – rather, coverage is barred if a court determines that notice was unreasonably late. New York is a notable example.⁴

The best practice to avoid notice issues is to notify all applicable insurers as early as possible – preferably prior to incurring any costs. Even if notice is late, all is not lost; in most jurisdictions the claim will not be barred and should not serve as a basis for a claim denial. Seek guidance from a coverage attorney to help navigate late notice issues.

2. Cooperation

Another condition that often causes trouble for policyholders is the duty to cooperate. A typical provision might provide:

• You must cooperate with us in the investigation or settlement of the claim or defense against the suit.
• The insured must cooperate with the insurer in all matters pertaining to this Coverage Section as stated in its terms and conditions.
• The insured shall cooperate with the company and, upon the company’s request, shall attend hearings and trials, and shall assist in effecting settlements, securing and giving evidence, obtaining the attendance of witnesses and in the conduct of suits.

While this condition seems straightforward, and often is, insurers frequently raise violation of this duty as a coverage defense. This condition often arises under liability policies where the insurer is not actively defending a third-party claim against a policyholder, but rather is conducting a particularly lengthy investigation or where the policy is subject to a large retention or deductible. Insurers who raise this condition as a defense may assert that the policyholder failed to provide sufficient responses to its requests for information or failed to advise it of settlement discussions, mediations or other important case developments.

Policyholders do have a duty to cooperate and absolutely should cooperate with an insurer’s reasonable, good faith requests. The insurer needs to have copies of the underlying claim file and invoices for payment, for example. Requests that are unreasonable are another matter. For example, the policyholder should not have to repeatedly provide multiple versions of voluminous claim information to the insurer each time a new adjuster appears on the file. Policyholders should not have to turn over proprietary business information that is wholly unrelated to the claim. Indeed, such facts can lead to allegations of bad faith claims handling conduct.⁵

Like notice, while this condition certainly can be an issue, it is only detrimental if the insurer can establish that it was actually prejudiced by the policyholder’s alleged failure to cooperate. Further, it is important to remember that an insurer cannot rely on a violation of a policy condition to deny coverage if it has breached the duty to defend or has otherwise denied coverage. In other words, if an insurer has refused to defend you or has denied your claim, it waives its right to rely on policy conditions, including the cooperation condition.

3. Consent and Voluntary Payments

The next commonly-raised condition is consent. The consent condition comes in various forms, but generally states that insurers do not have to pay what the policy refers to as “voluntary payments” (i.e., payments for which the policyholder has not obtained the insurer’s consent). This condition is raised in various contexts, such as when a policyholder pays certain costs prior to notice or settlements when the insurer was not involved. Consent issues also arise in the context of environmental cleanup administrative actions when a policyholder enters into consent agreements without the insurer’s input. While this condition can be concerning and is frequently asserted by insurers as a bar to coverage, it rarely is.

First, such payments are often not truly “voluntary.” For example, insurers argue that amounts paid by policyholders to investigate and cleanup a superfund site in an EPA CERCLA action are “voluntary” because they are incurred pursuant to a “consent” agreement to investigate and study the issue. Any policyholder who has been through this experience, however, will tell you their actions were anything but “voluntary” – they really have no choice in the matter. Non-compliance with “consent” decrees subjects policyholders to onerous penalties and fines. This is why nearly all courts that have addressed this matter have rejected the insurers’ argument in this regard.⁶

Second, like the cooperation condition, an insurer can only defeat coverage if it can show prejudice.⁷ And prejudice is rare.

Further, an insurer that has failed to defend or has denied coverage waives its right to rely on conditions (particularly true as it relates to the consent condition): an insurer that has abandoned its policyholder cannot then complain that the policyholder failed to seek its consent prior to paying a settlement.⁸ Instead, the insurer is obliged to indemnify the policyholder for any reasonable settlement, which is defined to include any settlement that is not fraudulent.

As it relates to the consent condition, the best defense is a good offense: a policyholder that keeps its insurer up to date regarding the status and key developments of its claim, even if the insurer is not defending, can generally avoid running afoul of this condition.

4. Loss Payable/Attachment

Umbrella and excess coverage is critically important where the claim at issue may exceed the primary policy’s limit, particularly where the underlying claims are mass tort liabilities. Policyholders may think that because the primary insurer is defending and/or paid its portion of indemnity, the transition to excess coverage will be smooth. More often than not, however, policyholders are surprised to find themselves battling with their umbrella and excess insurers. A common dispute arises from the loss payable/attachment provision that can be found as a condition set forth in most umbrella and excess policies:

• Liability under this policy with respect to any occurrence shall not attach unless and until the insured, or the insured’s underlying insurers, shall have paid the amount of underlying limits on account of such occurrence.
• Liability of the company with respect to any one occurrence shall not attach unless and until the insured, the company on behalf of the insured, or the insured’s underlying insurer, has paid the amount of retained limit.

This condition gives rise to several questions: Does the policy attach only after the primary limits are actually paid, or when the liability is simply incurred? Does it matter who pays – the insured or the primary insurer? What if the primary insurer is insolvent? What if there’s a gap between the settlement amount paid by the primary insurer and primary limit? An entire paper could be devoted to these issues, which is beyond the scope of this article. However, three things bear mentioning here.

First, the seminal case regarding whether a settlement for less than policy limits may properly exhaust a policy is Zeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665 (2nd Cir. 1928). There, the excess insurer contended the below-limits settlement with the primary insurer prevented the underlying policy from exhausting as defined in the excess policy, effectively eliminating coverage. The court rejected this argument, holding that the insurer “had no rational interest in whether the insured collected the full amount of the primary policies, so long as it was only called upon to pay such portion of the loss as was in excess of the limits of those policies.” Many jurisdictions follow the rationale set forth in Zeig and hold that it does not matter who, how, or how much is paid to exhaust the primary policy: the excess insurer is still obliged to cover the loss exceeding the underlying limit.⁹ But some jurisdictions have reached a different result.¹⁰

Second, generally speaking, the fact that a primary insurer is insolvent is insufficient to require an umbrella or excess insurer to 'drop down' and defend an insured.11 However, courts have required this of excess and umbrella insurers where the specific policy language at issue expressly requires it, or if the court finds the language to be ambiguous and construes it against the insurer. The outcome of these decisions depends on the policy language describing the attachment points and requirements for proper exhaustion.¹² Nonetheless, many courts refuse to require excess insurers to 'drop down,' even where primary insurers are insolvent, frequently noting the low premiums charged for the higher layers of coverage.

Finally, even once triggered, excess/umbrella insurers may challenge the reasonableness and proper application of a primary insurer’s payments. The court in Matter of Viking Pump, Inc., 52 N.E.3d 1144 (N.Y. 2016) addressed this argument, for example. The court found that testimony regarding the defense strategy and the reasonableness of the underlying asbestos claims’ settlements, and compliance with the governing trigger of coverage, was sufficient to meet the burden. On the other hand, courts will not deem an underlying policy exhausted when the underlying insurer has merely “burned” its limits. Excess/umbrella insurers also may argue that the primary policy limits are not properly exhausted if the claim payments were allocated unreasonably or contrary to the governing law. However, if the primary insurers’ allocation is objectively reasonable, an excess/umbrella insurer should not be permitted to retroactively re-allocate claims and dictate what allocation method the primary insurers should have used.

Coverage issues involving umbrella and excess policies are among the most complex in insurance law and often require guidance from experienced coverage counsel. A practical takeaway, however, is to ensure that any excess and umbrella insurers whose policies may be triggered by the underlying claims are involved early and notified of key developments in the case. If all players are involved early, future transition issues may be easier.

5. Contractual Limitations

Last but not least, one condition that tends to creep up on policyholders limits the time period for filing a coverage lawsuit condition – Legal Action Against Us:

• The insured may not bring any legal action against the insurer involving loss unless the insured has complied with all terms of this Coverage Section and unless brought within two (2) years from the date of the loss.
• If any limitation in this Condition is prohibited by law, such limitation is amended so as to equal the minimum period of limitation provided by such law.
• This condition can be problematic under certain circumstances.

First, despite challenges by policyholders, contractual limitations periods are generally enforceable, even if the period is one or two years.¹³ However, there may be a waiver of a contractual time limitation provision by the insurance company in certain cases. Second, this condition can catch policyholders off guard based on what event triggers the limitations period: the date of loss or the date the claim was denied.¹⁴

The key take away is to review your policy shortly after your loss to determine if it contains a limitations period and, if so, what event starts the clock. Further, if the deadline is approaching and the insurer hasn’t provided a coverage determination or if the claim is in dispute, the policyholder should obtain a written extension of the policy’s limitations period for filing suit. Extensions are commonly provided in these cases.

In sum, while conditions can be technical and should be treated with care from the start, condition violations should not always result in denied claims. When it comes to conditions, most often the best defense is a good offense.
 

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1. Goodyear Tire & Rubber Co. v. Aetna Cas. & Sur. Co., 95 Ohio St.3d 512, 2002-Ohio-2842, 769 N.E.2d 835.
2. Ferrando v. Auto–Owners Mut. Ins. Co., 98 Ohio St.3d 186, 2002-Ohio-7217, 781 N.E.2d 927; Ormet Primary Aluminum Corp. v. Employers Ins. of Wausau, 88 Ohio St.3d 292 (2000).
3. See, e.g., Fiorito v. The Superior Court of San Diego Co., 226 Cal.App.3d 433, 438 (1990); Shell Oil Co. v. National Union Fire Ins. Co. of Pittsburgh, 44 Cal.App.4th 1633 (1996).
4. Argo Corp. v. Greater N. Y. Mut. Ins. Co., 827 N.E.2d 762 (N.Y. 2005); Security Mut. Ins. Co. of N.Y. v. Acker-Fitzsimons Corp., 293 N.E.2d 76 (N.Y. 1972); Utica First Ins. Co. v Vazquez, 92 A.D.3d 866 (N.Y. App. Div. 2012); In re Nationwide Mut. Ins. Co. (Mackey), 808 N.Y.S.2d 797 (N.Y. App. Div. 2006); Atlantic Gen. Contracting, Inc. v. U.S. Liab. Ins. Group, 806 N.Y.S.2d 225 (N.Y. App. Div. 2005).
5. Zaycheck v. Nationwide Mut. Ins. Co. (Ohio Ct. App., Summit County June 29, 2007), No. 23441, 2007 Ohio App. LEXIS 3065, *14 (question of fact as to whether insurer’s repetitive requests for documentation that the insured had already provided were made in bad faith).
6. SnyderGeneral Corp. v. Century Indem. Co., 113 F.3d 536, 539 (5th Cir. 1997) (Texas law); Hazen Paper Co. v. U.S. Fid. & Guar., 555 N.E.2d 576 (Mass. 1990); Farmland Indus., Inc. v. Republic Ins. Co., 941 S.W.2d 505 (Mo. 1997).
7. Ferrando v. Auto-Owners Mut. Ins. Co., 98 Ohio St. 3d 186, 781 N.E.2d 927, Syll. (2002) (defenses based on violation of consent-to-settle provisions may be rebutted by proof that the insurer was not prejudiced); Abercrombie & Fitch Co. v. Federal Ins. Co., No. 09-3096, 2010 U.S. App. LEXIS 5282 (6th Cir. March 11, 2010).
8. Sanderson v. Ohio Edison Co., 69 Ohio St.3d 582, 587 (1994) (“Neither the insured nor the injured party is required to perform conditions in a policy made vain and useless by reason of the insurer’s prior breach.”).
9. The Continental Ins. Co. v. Northern Ind. Public Service Co., No. 2:05-CV-156, 2011 WL 1322530 (N.D. Ind. April 5, 2011)(“it appears the recent trend in Indiana law is to accommodate claims against the excess insurer after the claim has been settled with the primary insurer. To the extent that [the insured] settled with the primary insurers for less than the applicable limits, [the insured] is considered self-insured up to the policy limits”).
10. Qualcomm, Inc. v. Certain Underwriters At Lloyd’s, London, 161 Cal. App. 4th 184 (4th Dist. 2008) (CGL policy exhausted only after “the insurers under each of the Underlying Policies have paid or have been held liable to pay the full amount of the Underlying Limit”); Comerica Inc. v. Zurich American Ins. Co., et al., 498 F. Supp. 2d 1019, 1032 (E.D. Mich. 2007) (requiring actual payment of limits by primary insurer to trigger coverage under excess policy).
11. Revco D.S., Inc. v. Government Employees Ins. Co., 791 F. Supp. 1254 (6th Cir. 1991).
12. See Zurich Ins. Co. v. Heil Co., 815 F.2d 1122, 1125 (7th Cir.1987) (listing cases).
13. Hounshell v. Am. States Ins. Co. (Aug. 5, 1981), 67 Ohio St.2d 427, 429-430, 21 O.O.3d 267, 424 N.E.2d 311.
14. Bethel Village Condominium Assn. v. Republic-Franklin Ins. Co., No. 06AP-691 2007 WL 416693 (Ohio Ct. App. 10th Dist. Feb. 8, 2007).

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Insurance Cases to Watch in 2019

David Sporar

2019 looks to bring substantive and compelling new developments in insurance law around the country. Take the following, for example:

• The California Supreme Court is poised to decide whether a policyholder must horizontally exhaust all lower-level insurance policies at each coverage level and for each year before it can access its higher-level policies. The trial court held that such complete horizontal exhaustion was necessary to access the higher-level coverage, but the court of appeals disagreed and reversed the trial court in part, holding that it depended on the language of each higher-level insurance policy. The opinion from which the appeal to the Supreme Court was taken is Montrose Chem. Corp. v. Superior Court, 14 Cal.App.5th 1306, 222 Cal.Rptr.3d 748 (2017), as modified (Sept. 8, 2017), review granted, 225 Cal.Rptr.3d 796, 406 P.3d 327 (2017). To date, briefing appears to be complete, but oral argument remains to be scheduled.
• The Connecticut Supreme Court will decide whether the “unavailability of insurance rule” applies under Connecticut law. The rule provides that defense and indemnity costs cannot be prorated to an insured for periods where insurance was unavailable to the insured. The trial court held that the rule applied, and the court of appeals agreed. The opinion from which the appeal to the Supreme Court was taken is R.T. Vanderbilt Co., Inc. v. Hartford Accident & Indem. Co., 171 Conn.App. 61, 156 A.3d 539 (2017), review granted in part, 327 Conn. 923, 171 A.3d 63 (2017). To date, briefing continues, and oral argument remains to be scheduled.
• The Georgia Supreme Court is considering whether correspondence from an insured to its insurer put the insurer on sufficient notice of an opportunity to settle a claim within policy limits. The insurer did not settle the claim before the insured obtained a civil judgment for over five million dollars in excess of the policy limits; and the insured pursued the insurer for that full amount under the theory of negligent or bad faith refusal to settle. The trial court held that the correspondence was too vague to constitute sufficient notice of an opportunity to settle and, therefore, granted the insurer summary judgment. The court of appeals reversed the trial court in part, holding that the correspondence created a genuine issue of material fact for trial. The opinion from which the appeal to the Supreme Court was taken is Hughes v. First Acceptance Ins. Co. of Georgia, Inc., 343 Ga.App. 693, 808 S.E.2d 103 (2017), cert. granted (June 4, 2018). Briefing appears to have concluded in October 2018, but oral argument remains to be scheduled.

Although these are matters of law specific to each state, the decisions will no doubt serve as guideposts in the development of the law in other jurisdictions. Stay tuned . . .

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General Contractors Beware: Using Endorsements to Cover Your "Own Work" in the Wake of the Ohio Northern Univ. Decision

Christopher T. Teodosio

Co-Author: Pat O'Neill, The O'Neill Group 

While general contractors oversee entire construction projects, specialized subcontractors, such as masons, roofers, electricians and other trades, often perform those portions of the projects falling within their scope of work. Despite its use of skilled subcontractors, the general contractor remains responsible for the project as a whole. This responsibility has important implications regarding the general contractors’ insurance coverage in states like Ohio, where the Ohio Supreme Court has ruled that, even where a general contractor utilizes subcontractors, the entire construction project is the general contractor’s work. Ohio N. Univ. v. Charles Construction Servs., Inc., 2018-Ohio-4057. Accordingly, Ohio law may prevent general contractors from obtaining coverage under their own standard CGL policies for damage to any portion of a project, even if a subcontractor performed the defective work. This article provides a brief overview of the Ohio Northern decision and its predecessor, Westfield Ins. Co. v. Custom Agri Sys., Inc., 133 Ohio St.3d 476, 2012-Ohio-4712 and identifies potentially-available endorsements that cover gaps in coverage related to the Ohio Northern and Custom Agri decisions.

A. Claims for Faulty Construction Under Ohio Law.¹

In 2012, the Ohio Supreme Court held that an insured’s claims for defective construction or faulty workmanship arising from its own work are not covered under a commercial general liability policy: they are “not claims for ‘property damage’ caused by an ‘occurrence’…” Westfield Ins. Co. v. Custom Agri Sys. Ins.,133 Ohio St.2d 476, 2012-Ohio-4712 at Syl. The Custom Agri Court, however, cited with approval previous Ohio cases that found coverage for consequential damages arising from the defective work, subject to the conditions and exclusions in the policy. For example, under Custom Agri, if a policyholder defectively installed a roof on a building and the defective roof allowed water to leak in the building and damage the top floor, the cost to repair the roof (the defective work itself) would not be covered, but the water damage to the top floor (the consequential damages) would be covered.

Custom Agri left open the question of whether defective construction performed by a subcontractor (as opposed to the general contractor itself) could be a covered “occurrence” under the general contractor’s liability policy. In Ohio Northern, the Ohio Supreme Court answered this question. At issue in Ohio Northern was property damage arising from a subcontractors’ faulty work. The general contractor sought coverage under its commercial general liability policy, its insurer denied the claim, and litigation ensued. The question ultimately decided by the Ohio Supreme Court was whether the general contractor’s liability policy covered the costs to repair or replace its subcontractor’s defective work. Or, in other words, whether Custom Agri—which held that repair of a policyholder’s own work was not covered—applied to bar coverage of a general contractor’s claim for a subcontractor’s faulty work. The Court found that Custom Agri applied and that the general contractor could not recover under its policy for damages arising from the subcontractor’s faulty work.

B. General Contractors Should Consider Additional Coverage in Light of Ohio Northern

Coverage is available to general contractors for the gaps in coverage that the Ohio Supreme Court’s decisions in Ohio Northern and Custom Agri identified. Most insurance companies have the ability to offer coverage for property damage caused by a subcontractor through an endorsement (i.e., an extension of coverage) to the general contractor’s policy; however, the coverage that insurers offer is not standard across the industry. Some examples of insurers’ individual endorsements are:

Cincinnati Insurance - GA 4315 03 12 Injury or Damage To Or Resulting From Your Work And Injury Or Damage Resulting From Your Product. This coverage form states that damage from completed work performed by higher-tiered subcontractor is property damage caused by an occurrence.

Westfield Insurance - CG7121 Damage to Your Work. This form provides coverage for property damage that is the result of work performed by a subcontractor as long as the subcontractor is not a Named Insured and the property damage is unexpected or unintended.

CNA - CNA 74906 1 15 Damage to Subcontractors’ Work Endorsement. This policy form provides coverages for the Named Insured due to unintended or unexpected property damage that is the result of work performed on the Named Insured’s behalf by a subcontractor, consists of your work performed by the subcontractor, or for other property damaged by the subcontractor’s work.

If you utilize subcontractors, it is imperative that you review the language of your current insurance policy or consult with your current insurance broker about the Ohio Northern decision to confirm that you have the proper coverage.

 

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1. For a more complete analysis of the Ohio N. Univ. decision, please refer to Ohio Supreme Court Narrows Coverage for Construction Defect Claims, Amanda Leffler and Anastasia Wade, Ins. Cov. Newsletter Fall 2018, Vol. XXI.

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Wisconsin Follows "Cause Theory" in Determining Number of Occurrences

Andrew W. Miller

In Secura Insurance v. Lyme St. Croix Forest Company, LLC, No. 2016AP299 (Oct. 30, 2018), the Wisconsin Supreme Court determined the number of occurrences arising from a large forest fire that took place in May of 2013. The fire in question allegedly began in a piece of logging equipment and quickly spread to an adjacent grass pile and eventually the surrounding forest. In total, the fire consumed 7,442 acres over three days, damaging the real and personal property of many individuals and businesses.

Ray Duerr Logging, Inc., the owner of the piece of equipment that ignited and caused the fire, sought coverage for damage to third-party property under a commercial liability policy issued by Secura. That policy contained a general aggregate limit of $2,000,000, but a sub-limit of $500,000 per occurrence “due to fire, arising from logging operations…” The policyholder took the position that the fire constituted several occurrences; specifically each time the fire spread to a new property represented a new occurrence. Secura, in turn, argued that the entire fire constituted a single occurrence.

In finding that the fire was a single occurrence, the court noted that Wisconsin followed the “cause theory” as opposed to the “effect theory” when determining whether an event is a single occurrence or multiple occurrences. Under the cause theory, “‘where a single, uninterrupted cause results in all of the injuries and damage, there is but on accident or occurrence.’”¹ Alternatively, “the effect theory suggests that the wording ‘each accident’ ‘must be construed from the point of view of the person whose property was injured.’”²

The policyholder’s position – that each time the fire spread to a new property represented a new occurrence – fit with the effect theory of causation, as from the standpoint of each property owner, the damage to their own property was a new, separate accident. However, the court could not square this view with the cause theory. Here, the cause of the fire in question all traced back to the fire in the logging equipment. Further, the court noted that while the fire spread over a large area, it was all within the same geographic area. And the fire was continuous – there was no temporal break over the three days that the fire spread. In sum, there was no way that the fire could be considered anything other than a single cause, meaning that coverage under Secura’s policy was limited to a single, $500,000 occurrence limit.

This case highlights the importance of purchasing adequate occurrence limits. Here, while the policyholder purchased $2,000,000 in coverage, $1,500,000 of the limits was unavailable due to the triggering of the applicable per-occurrence limit in the policy.
 

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1. 1Secura Insurance at P21 (quoting Welter v. Singer, 376 N.W.2d 84 (Ct. App. 1985)).
2. Id. At P22 (quoting Anchor Cas. Co. v. McCaleb, 178 F.2d 322, 324 (5th Cir. 1949)).

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Attorney Highlights

Jodi Spencer Johnson was appointed as co-chair of the Insurance Recovery Practice Group.

On December 3-7, 2018, Paul A. Rose taught a course titled “How the US Constitution Shapes Individual Rights” at the Lifelong Learning program in San Miguel de Allende, Guanajuato, Mexico.

Amanda M. Leffler, Paul A. Rose, Stacy RC Berliner, and Joseph P. Thacker were selected as 2019 Ohio Super Lawyers for Insurance Coverage.

Lucas M. Blower, Andrew W. Miller, Gabrielle T. Kelly and Nicholas J. Kopcho were selected as 2019 Ohio Super Lawyers Rising Stars for Insurance Coverage.

Amanda M. Leffler was selected as a Top 50 Ohio Female Attorney and a Top 25 Cleveland Female Attorney for 2019 by Super Lawyers, a service of Thomson Reuters Legal Division.

Andrew W. Miller will speak at a roundtable titled “The Data Driven Lawyer - Causation, Genomics, and the Impact on Insurance Coverage” at the ICLC Conference on March 1, 2019.

Lucas M. Blower spoke on “Cyber Insurance” and Anastasia J. Wade spoke on “Insurance Coverage for When Your Company Goes Viral” at the Akron Bar Association on January 29, 2019.

Save the Date

7th Annual Insurance Coverage Conference
Thursday, October 10, 2019

Check out our Construction and Insurance Coverage Roundtable on Apple Podcasts, Google Play and now Spotify, or by visiting: https://brouseroundtables.simplecast.fm

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Ohio Supreme Court Narrows Coverage for Construction Defect Claims

Amanda M. Leffler, Anastasia J. Wade

 

On October 9, 2018, the Ohio Supreme Court issued its long-awaited decision in Ohio Northern Univ. v. Charles Constr. Servs., 2018-Ohio-4057, holding that a general contractor was not entitled to insurance coverage for its subcontractor’s faulty work. Since then, some commentators have described the Court’s holding as eliminating all insurance coverage for claims involving defective construction. Such a broad reading is not warranted. Still, Ohio’s insureds would be wise to consider purchasing an endorsement that is readily available in today’s insurance market.

Coverage for Construction Defect Claims Nationally

For years, courts around the country have grappled with coverage for claims involving defective or faulty construction. These cases generally turn on whether the court determines that defective construction is an “occurrence.” An “occurrence” is defined as an accident, including continued or repeated exposure to harmful conditions. In practice, faulty work is almost always an accident as that word is commonly understood—contractor-insureds rarely, if ever, intend or expect to cause injury to persons or property, including their own work. Thus, the industry has long understood that insurance policies will generally provide at least some coverage for damage arising from defective work, subject to policy exclusions that bar coverage for the actual repair or replacement of an insured’s faulty work. Insurers, however, argue that defective work is a non-accidental “business risk” that is not an “occurrence” covered by the policy. Since 2012, almost all courts that have considered the issue have held that defective construction is an “occurrence” and, thus, it is covered by the policy, at least to the extent that work other than the insured’s work is damaged. See Black & Veatch Corp. v. Aspen Ins. (Uk) Ltd, 882 F.3d 952, 966 (10th Cir.2018) (citation omitted).

Ohio’s Position: Westfield Ins. Co. v. Custom Agri Sys., Inc.

In 2012, the Ohio Supreme Court decided Westfield Ins. Co. v. Custom Agri Sys., Inc., 2012-Ohio-4712, holding that claims for the cost to repair an insured’s defective work are not covered because they “are not claims for ‘property damage’ caused by an ‘occurrence’ under a commercial general liability [CGL] policy.” In its decision, however, the Court cited and approved of prior Ohio case law which held that consequential damages arising from a policyholder’s defective work generally are covered by CGL policies. Since Custom Agri, insurance practitioners and courts in Ohio have generally agreed that:

• Repair and replacement of a policyholder’s defective work is not “property damage caused by an occurrence” and is not covered by standard CGL policies; and
• Consequential damages to property other than the policyholder’s work is “property damage caused by an occurrence” and may be covered by a standard CGL policy depending upon the applicability of the policy’s exclusions and conditions.

Notably, however, the Custom Agri Court did not address whether a typical CGL policy would provide coverage for the repair or replacement of defective work performed by the policyholder’s subcontractors. The Court addressed this issue in Ohio Northern.

Coverage for Subcontractor Work: Ohio Northern

In 2008, Ohio Northern contracted with Charles Construction Services (CCS) to construct a hotel and conference center. After CCS and its subcontractors completed the work, Ohio Northern discovered significant issues with the work and brought suit against CCS. CCS tendered the claim to its insurer, Cincinnati Insurance Company, which argued that it had no coverage obligations under Custom Agri. In response, CCS argued that Custom Agri was inapplicable because subcontractors performed almost all of the work at issue, not CCS.

The trial court granted summary judgment to Cincinnati, but the Third District Court of Appeals reversed. In finding in favor of CCS, the appellate court analyzed certain policy exclusions that expressly preserved coverage for damaged work or damages arising from faulty work if: (1) a subcontractor performed the work; and, (2) the damage occurred after project completion. Cincinnati then appealed to the Ohio Supreme Court, which accepted the following proposition of law for review:

[Custom Agri] remains applicable to claims of defective construction or workmanship by a subcontractor included within the “products-completed operations hazard” of [a] commercial general liability policy.

Thus, the question before the Court was whether Custom Agri applies to claims involving a subcontractor’s faulty work. In its decision, the Court concluded that Custom Agri does apply to such claims.

The Court acknowledged that its decision went against the weight of authority from its sister-courts nationally, but nonetheless applied Custom Agri to hold that “property damage caused by a subcontractor’s faulty work is not fortuitous and does not meet the definition of ‘occurrence’ under a CGL policy.” The Court failed to address several arguments, including: (1) that this interpretation rendered meaningless the carve-back for subcontractor work in the Your Work exclusion; (2) that the drafting history of the exclusions confirmed that the insurers themselves intended to provide coverage for subcontractor defective work; and, (3) that the meaning of “occurrence” used in Custom Agri contradicted the long-standing meaning given to the word in every other context. Instead, the Court suggested that the Ohio General Assembly could address the issue by requiring that all policies issued in Ohio define “occurrence” to include defective workmanship. Of course, this suggestion brings little comfort to the contractor-insureds that paid substantial sums for “completed operations” endorsements that were intended to provide coverage for these claims in the first place.

What’s Next for Ohio’s Construction Insureds?

Many commentators have written that the decision in Ohio Northern eliminates all coverage for construction defect claims. Taken to its logical conclusion, the absurdity of this argument is evident. Suppose an insured incorrectly affixes materials to the façade of a building, resulting in falling masonry that strikes and kills an innocent bystander. Or, suppose an insured incorrectly installs wiring during construction, resulting in a fire that destroys both the project and surrounding homes. Would any insurer even argue that there is no coverage for such claims?

The Court’s opinion in Ohio Northern cannot be read so broadly. The Court answered a narrow question: does Custom Agri apply to subcontractor work? The answer, according to the Court, is yes. But, Custom Agri held that, while there is no coverage for the repair or replacement of a policyholder’s defective work, there is coverage for consequential damages arising from that defective work. While at times the Court’s language in Ohio Northern is imprecise, the Court makes clear over and again that it is simply applying its precedent, Custom Agri. Notably, the Custom Agri Court relied upon multiple cases previously decided by Ohio courts holding that consequential damages arising from defective construction are covered occurrences. Had the Ohio Northern Court intended to overrule this prior precedent, cited in Custom Agri, it easily could have stated its intention to do so. The Court’s silence on these cases means they are still applicable to Ohio policyholders. Thus, consequential damages arising from defective construction should still be covered under CGL policies.

In fact, even Cincinnati recently confirmed that the Court’s opinion cannot be read so broadly as to eliminate coverage for consequential damages. In its response to a motion to reconsider filed by Ohio Northern, Cincinnati stated that the opinion “correctly recognizes that consequential damages, when they exist, may be covered.” For example, Cincinnati acknowledged that a subcontractor’s CGL coverage would apply at least “where a subcontractor damages part of a construction project that is not within its subcontract.” According to Cincinnati, the Court found no coverage for the consequential damages at issue in Ohio Northern because CCS was a general contractor and all of the damage to the project was CCS’s “work.”

An Ounce of Prevention…

While coverage firms like Brouse McDowell can and should continue to advocate for coverage for consequential damages, Ohio’s contractors should nonetheless consider purchasing additional coverage, particularly if they are acting as a general contractor. Numerous insurers now offer endorsements that reinstate the coverage that the Ohio Northern decision arguably eliminated. For example, some insurers amend their insuring agreement to specifically cover property damage to an insured’s work if it is performed by a subcontractor and falls within the products-completed operations hazard. Other insurers “deem” that property damage to the insured’s work is caused by an occurrence if it is unexpected and unintended. Yet other insurers amend the definition of “occurrence” to include “subcontracted property work damage.”

There may be material differences in how these various forms operate and the extent of coverage they provide, which is a subject that is beyond the scope of this article. Policyholders in Ohio should contact their brokers to discuss the options available to them and, if appropriate, should contact coverage counsel to discuss how the various, differing forms would operate. For their part, owners and developers should amend their construction contracts to compel contractors to purchase such endorsements.

Insureds and sophisticated brokers will understandably question why they and their clients must pay higher premiums to purchase endorsements to protect themselves from claims that the insurers intended would be covered by the existing CGL form. Nonetheless, here, an ounce of prevention is worth a pound of cure, and construction industry participants should contact their brokers and counsel today.

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Stronghold Proposes Solvent Scheme

Andrew W. Miller

co-author: Dan Maloney, VP, Nathan Inc.

All policyholders with historical commercial general liability coverage, including umbrella or excess coverage should take note: Stronghold Insurance Company, a solvent London Market company, recently announced that it is proposing a solvent scheme of arrangement. Stronghold issued coverage in the London market from 1962 through 1985, when it entered into a solvent run-off.

In the Scheme, which is a method under which Stronghold can formally resolve past, present, and future claims, any policyholders with claims (including potential future liability) will have a final opportunity to reach a settlement with Stronghold. Stronghold has just begun the process – the next steps will include a Court hearing to sanction the Scheme plan, holding a Creditor vote on the plan (expected to be in December), setting an Effective Date for the Scheme, and setting a Scheme submission date (expected to be in July 2019).

The best way to prepare is to evaluate your situation now. This includes understanding whether you have impacted coverage; valuing the coverage, your potential liabilities, and the resulting Stronghold claim; and, determining whether to participate in the Scheme vote and submission process.

We can assist you with each of these steps. Please contact us to talk further about how you can best respond to this development and ensure that you receive compensation for your coverage.

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Brouse McDowell Adds Seven Insurance Coverage Lawyers

Over the past 30 years, Brouse McDowell has consistently obtained favorable results for policyholders, making pro-policyholder insurance coverage law in the process. Our attorneys have been on the front lines in seminal insurance coverage cases in Ohio and beyond, with a robust local, regional, and national insurance recovery practice. Recently combining with the firm of Thacker Robinson Zinz, Brouse McDowell now has more than twenty-five attorneys practicing in the area of insurance recovery, including seven attorneys certified by the Ohio State Bar Association as specialists in insurance coverage. This combination also expands the firm’s geographic presence to Toledo and Naples, Florida.

There are few spaces within the insurance community that are untouched by the combined force of Brouse McDowell’s insurance recovery attorneys. Well-known authors and speakers on insurance coverage topics both locally and nationally, our attorneys participate in and lead insurance groups in local, state, and national bar associations. We also maintain close working relationships with other industry insiders such as brokers, claims management specialists, and forensic accountants.

The advantage that the new Brouse McDowell insurance recovery group provides to our policyholder clients is priceless. By expanding the number of tools and resources within our insurance recovery group, we can respond to a broad array of insurance-related issues more efficiently than ever. The firm looks forward to continuing to use the breadth and depth of our experience to help our clients protect one of their most important assets and maximize their insurance recoveries.

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Update: Ohio Affirms Preeminence Of State Insurance Law

Sallie Conley Lux

The controversy over the recently adopted Restatement of Law, Liability Insurance (RLLI) continues. On July 30, 2018, Ohio Governor John Kasich signed a law which unequivocally affirms that, in Ohio, state insurance statutes and state common law continues to be preeminent in insurance disputes governed by Ohio law.

Senate Bill 239 was primarily sponsored by Senator Matt Dolan and passed unanimously. The law becomes effective October 29, 2018. While the bill contained a number of non-insurance related provisions, it specifically addressed the RLLI. The bill as approved and signed adopts Ohio Rev. Code section 3901.82 which states: “The ‘Restatement of the Law, Liability Insurance’ that was approved at the 2018 annual meeting of the American law institute (sic) does not constitute the public policy of this state and is an inappropriate subject of notice.” Reportedly, the ALI has confirmed that Ohio is the first state ever to address legislatively a Restatement of Law in its entirety.

The Restatements of Law are adopted by the American Law Institute, “the leading independent organization in the United States producing scholarly work to clarify, modernize, and improve the law.” The Restatements are extremely persuasive and influential in both state and federal courts throughout the country, routinely cited in briefs advocating various legal concepts and principles, and cited and relied upon in an untold number of judicial decisions announcing controlling legal principles in various states.

Some jurists and practitioners caution that some of the influential Restatements in certain circumstances have moved beyond clear statements of what the law is to statements of what the law should be, in the view of the ALI:

I write separately to note that modern Restatements . . . are of questionable value, and must be used with caution. The object of the original Restatements was “to present an orderly statement of the general common law.” Restatement of Conflict of Laws, Introduction, p. viii (1934). Over time, Restatements’ authors have abandoned the mission of describing the law, and have chosen instead to set forth their aspirations for what the law ought to be…Restatement sections such as that should be given no weight whatsoever as to the current state of the law, and no more weight regarding what the law ought to be than the recommendations of any respected lawyer or scholar.

Kansas v. Nebraska, 135 S. Ct. 1042, 1054 (Scalia, J., concurring and dissenting).

The recent adoption of the RLLI in May, 2018 was the culmination of many drafts over a number of years. As it evolved, the project was the object of intense interest and scrutiny by insurance scholars and practitioners representing both insurers and policyholders. Throughout its evolution, many aspects of the project were highly debated, and many proposed Sections of proposed statements of law were contested in comments submitted by interested parties.

Because of the comprehensive nature of the RLLI, which addresses a wide range of insurance topics, there remain many differences of opinion on whether particular statements of law reflect clear and accurate restatements of the law or statements of what the law should be. And, not unsurprisingly, advocates of a certain perspective may view certain sections of RLLI to be accurate reflections of the law, while other sections are not.

Insurance law is a matter of state law. It is governed by state statutes and common law, and may vary from state to state. As cases are litigated, and the resultant common law in each state is established and evolves, majority and minority views among the states concerning various insurance principles inevitably develop.

Presumably, Ohio legislators were concerned both (1) that the RLLI as adopted reflects, at least in part, aspirational statements of what the law should be, as proposed by the ALI, rather than statements of established black letter law; and (2) that specific provisions and sections of the RLLI do not accurately reflect Ohio law on particular topics.

Accordingly, the legislature took the unprecedented step of adopting Ohio Rev. Code section 3901.82, which protects the integrity of established Ohio law in insurance disputes. While the RLLI may be referenced and cited as persuasive authority in advocating for a certain position or change in the law, this recent legislation makes it crystal clear that, despite the recently adopted RLLI, the established and developing insurance common law of Ohio and Ohio insurance statutes continue to govern the Courts in Ohio and control Ohio insurance disputes.

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Attorney Highlights

Brandi L. Doniere and Andrew W. Miller were both named to The Toledo Business Journal’s list of Who’s Who in the Toledo Area Law for Insurance. (2 of only 5 attorneys named for the insurance practice area!)

Stacy RC Berliner, Jodi Spencer Johnson, Paul A. Rose, and Joseph P. Thacker were selected for inclusion in the Best Lawyers in America © for Insurance Law.

Christopher J. Carney, Clair E. Dickinson, and Joseph P. Thacker were selected for inclusion in the Best Lawyers in America © for Commercial Litigation.

Meagan L. Moore was selected for inclusion in the Best Lawyers in America © for Environmental Law.

Joseph P. Thacker was selected for inclusion in the Best Lawyers in America © for Bet-the-Company Litigation.

Alexandra V. Dattilo was installed as an elected director of the Federal Bar Association, Northern District of Ohio Chapter.

Congratulations to Christopher T. Teodosio on the new addition to his family! Baby Ava Teodosio was born on September 9, 2018.

Jodi Spencer Johnson attended the American Bar Association Section of Litigation Fall Leadership Meeting, September 27-29, 2018.

Stacy RC Berliner, Lucas M. Blower, and Andrew W. Miller presented at the Ohio State Bar Association’s Insurance Law Program on October 16, 2018.

Amanda M. Leffler received Leadership Akron’s 2018 Family Difference Maker Award on November 6, 2018.

Stacy RC Berliner and Nicholas J. Kopcho will speak at the National Business Institute’s Insurance Coverage Litigation Boot Camp on December 6, 2018.

 

Thanks to All Who Attended!

Sixth Annual Insurance Coverage Conference
October 11, 2018
Check out our Construction and Insurance Coverage Roundtable on Apple Podcasts and Google Play, or by visiting: https://brouseroundtables.simplecast.fm

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Restatement of Law, Liability Insurance Approved: Attempts Comprehensive Look at All Aspects Governing Insurance Liability Law

Sallie Conley Lux

After years of work, at its annual meeting on May 22, 2018, members of the American Law Institute (ALI) approved Final Draft No.2 of its first ever Restatement of the Law, Liability Insurance (RLLI). The official text of the new Restatement is now ready for final editing before publication. The draft approved may be cited as the formal position of the ALI until the official text is published.

There are four chapters in the RLLI. The first includes topics relating to the application of basic contract law doctrines within the context of insurance law. The second chapter concerns insurance duties and doctrines, such as cooperation, defense, and settlement, relating to the management of insured actions. The third chapter presents principles that are common to risks insured by most forms of liability insurance. This chapter is divided into three general topics: provisions relating to coverage, provisions relating to conditions, and provisions relating to the application of deductions, retentions, and limits. The final chapter concerns a variety of topics relating to, inter alia, broker liability, bad faith, enforceability, and remedies.

Why It Matters: Insurance law is a matter of state law. It is governed by state statutes and common law, and may vary from state to state. As cases are litigated, and the resultant common law in each state is established and evolves, majority and minority views among the states concerning various insurance principles inevitably develop.

ALI is a private organization, founded in 1923, “to promote the clarification and simplification of the law and its better adaption to social needs, to secure the better administration of justice, and to encourage and carry on scholarly and scientific legal work.” ali.org/about-ali/how-institute-works/. ALI’s members, limited to 3000, include the justices of the U.S. Supreme Court, judges of the highest courts of most, if not all, states, law school deans and professors, and private practitioners. As described in ALI’s 2016-2017 Annual Report, the ALI “Is the leading independent organization in the United States producing scholarly work to clarify, modernize, and improve the law.”

In furtherance of its mission, the ALI develops Institute Projects which include Restatements, Principles, and Codes. Restatements are, for the most part, addressed to the courts and aspire to present “clear formulations of common law and its statutory elements, and reflect the law as it presently stands or might appropriately be stated by a court.” Although Restatements aspire toward the precision of statutory language, they are also intended to reflect the flexibility and capacity for development and growth of the common law. That is why they are phrased in descriptive terms of a judge announcing the law to be applied in a given case rather than in the mandatory terms of a statute.” ali.org/about-ali/how-institute-works/ (emphasis supplied). Thus, Restatements typically strive to harmonize both majority and minority views of law, and restate them.

The study of the various Restatements of Law is part of the fundamental course work of every law student in every law school throughout the country. The Restatements are also extremely persuasive and influential in both state and federal courts throughout the country, routinely cited in briefs advocating various legal concepts and principles, and cited and relied upon in an untold number of judicial decisions announcing controlling legal principles.

The development or update of a Restatement takes many years of work. It may include multiple drafts reflecting member comments and revisions advocating various positions, some of which are at odds with one another, before the final draft is ultimately approved as embodying the official positions of the ALI on the particular topic. Moreover, when considering or relying on a Restatement principle, it is crucial to keep in mind that “only the black letter and Comment are regarded as the work of the Institute. The Reporter’s and Statutory Notes remain the work of the Reporter.” Restatement of the Law of Liability Insurance, Proposed Final Draft No. 2, approved May 22, 2018, p. ix.

Some jurists and practitioners caution that some of the influential Restatements in certain circumstances have moved beyond clear statements of what the law is to statements of what the law should be, in the view of the ALI:

I write separately to note that modern Restatements . . . are of questionable value, and must be used with caution. The object of the original Restatements was “to present an orderly statement of the general common law.” Restatement of Conflict of Laws, Introduction, p. viii (1934). Over time, Restatements’ authors have abandoned the mission of describing the law, and have chosen instead to set forth their aspirations for what the law ought to be…Restatement sections such as that should be given not weight whatsoever as to the current state of the law, and no more weight regarding what the law ought to be than the recommendations of any respected lawyer or scholar.

Kansas v. Nebraska, 135 S. Ct. 1042, 1054 (Scalia, J., concurring and dissenting).

The Process Leading to Approval of the Restatement of Law: Liability Insurance: The RLLI project began in 2010 as a Principles of Law Project. Principles, unlike Restatements, do not purport to be statements of the law, but rather aspirational statements of what the law in a particular area should be. In 2014, the ALI’s Liability Insurance Principles project was recharacterized as a Restatement of Law project both because there is an established body of liability insurance law, and because, consistent with traditional Restatement projects, the Liability Insurance project’s goal was to provide guidance to courts.

Cumulatively, nearly 30 drafts and revisions were prepared during the project’s lifecycle. Over the years, the project has been the object of intense interest and scrutiny by insurance scholars and practitioners representing both insurers and policyholders. Throughout its evolution, many aspects of the project have been highly debated, and many proposed Sections of proposed statements of law have been contested in comments submitted by interested stakeholders, often resulting in section revisions.

As the project progressed, discrete Chapters, Sections, and revisions of the RLLI Project were submitted seriatim for review and approval by ALI members at different annual meetings, both before and after its recharacterization as a Restatement. At the 2017 annual meeting, the ALI decided to defer the vote for final approval of the RLLI until the 2018 annual meeting to allow the Reporters to again review the entirety of the draft and to consider comments.

That review process resulted in a number of fairly significant revisions, generally described in the Reporters’ Memorandum of the Restatement of the Law of Liability Insurance, Proposed Final Draft No. 2, pp. xix –xxiv. According to the Reporters’ Memorandum, the most significant revisions are contained in: Chapter 1, Sections 3 and 4 (adopting a plain meaning rule for policy interpretation including what constitutes an ambiguous term, and relatedly, the interpretation of ambiguity); Chapter 2, Section 12 (concerning liability of an insurer in connection with the defense of its insured); Chapter 2, Section 19 (providing that “[a]n insurer that breaches the duty to defend a legal action forfeits the right to assert any control over the defense or settlement of the action”); and Chapter 4, newly numbered Sections 47 and 48, (describing potential remedies for breach by the insurer, including an award of attorneys’ fees and costs to the insured in an action to determine coverage “when provided by state law or policy”).

Because of the depth and breadth of the Liability Insurance project, and the comprehensive nature of the topics ultimately included in the RLLI, there remain many differences of opinion on whether particular statements of law reflect clear and accurate restatements of the law or statements of what the law should be. And, not unsurprisingly, advocates of a certain perspective may view certain sections of RLLI to be accurate reflections of the law, while other sections are not.

Selected Provisions of Interest: All of the Sections of the RLLI that relate to attorneys and attorneys’ fees are of interest, a sampling of which follows:

Section 12 provides that an insurer may be held liable for the conduct of an attorney hired to represent the policyholder where the insurer did not use “reasonable care” in selecting counsel (section 12(1)) and the insured suffers harm resulting from the negligent conduct of the counsel selected by the insurer. Further, an insurer is also liable for harm resulting to a policyholder if the insurer directs counsel’s negligent conduct or omission in a manner that essentially “overrides” the independent professional judgment owed by defense counsel to the policyholder (section 12(2)).

Section 14 describes the basic obligations of the insurer to defend a claim against a policyholder. Those include the obligation to defend all causes of action, “including those not covered by the insurance policy.” Section 14(1)(a). The Section further specifically provides that counsel selected to defend the insured may not disclose “to the insurer any information of the insured that is protected by attorney–client privilege, work-product immunity, or a defense lawyer’s duty of confidentiality under rules of professional conduct, if that information could be used to benefit the insurer at the expense of the insured.” Section 14(1)(b). Finally, under Section 14(3), an insurer’s costs in defending the policyholder in the underlying action are in addition to the limits of the policy, unless the policy otherwise provides.

As discussed above, Section 19 directs that where there is a breach of the duty to defend the insurer forfeits any control over the defense or settlement.

Section 21 concerns whether or not an insurer may recover defense costs where a claim against a policyholder is ultimately determined to be not covered by the policy. This section states that an insurer may not recover from the insured fees and costs paid on behalf of a policyholder even for claims that are determined to be not covered, unless it is so stated in the policy or “otherwise agreed to” by the policyholder.

Section 48 describes the damages due an insured for breach of a liability policy. Specifically, if there is a breach of the duty to defend, “all reasonable costs of the defense of a potentially covered legal action,” subject to limits, deductibles or SIRs, are included as damages. “While insurers are obligated only to pay reasonable defense costs, what is reasonable in the case of a breach of defense duties is judged from the perspective of an insured forced to defend a liability action without the timely assistance of its insurer. In that circumstance, the negotiated rates that liability insurers pay their regular defense counsel are unlikely to provide a useful guide to what is reasonable.” Section 48, Comment (b).

The entirety of the Sections referenced above, as well as the other Sections in the RLLI relating to attorneys’ duties and obligations, insurers’ defense obligations, and the costs of defense, as well as principles of contract interpretation, trigger, allocation, settlement, bad faith, and broker liability, among others, contain a myriad of other relevant provisions which will be of great interest to the insurance industry, insurance consumers, and insurance practitioners.

Stay Tuned: As discussed above, the RLLI is comprehensive and covers the virtual universe of insurance law. As they examine the RLLI, insurance scholars and practitioners continue to disagree on whether the RLLI accurately reflect the law or the trend of the law on various discrete topics. Thus, there are many Sections of interest in the RLLI which warrant closer study and scrutiny. Stay tuned to future editions of Your Coverage Advisor for a more detailed look, examination, and analysis of additional insurance law topics of interest as restated in the newly adopted Restatement of Law, Liability Insurance.

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Back to Basics: Understanding Notice Provisions

Kerri L. Keller

Most insurance policies require that notice be given within a specified period of time. Usually, it is required “as soon as practicable.” Why are notice provisions in insurance policies important? They are important because they allow the insurer to become aware of claims or occurrences early enough to conduct an investigation. They also allow an insurer to determine whether allegations in a complaint state a covered claim. When an insurer receives notice, it can also step in and control the defense of the litigation, protect its interests, maintain proper reserves, and pursue possible subrogation claims.

Claims-made policies typically require that notice be given within a reasonable time and no later than the end of the policy period, or within some defined period of time or grace period. If they require a claim be reported during the policy period, or within some defined period of time or grace period, they are often referred to as “claims-made and reported” policies. Conversely, in an occurrence policy, such as a typical general liability policy, the policy will pay for occurrences (accidents) that happen during the policy period, even if the insurer receives notice of them after the policy expires. Occurrence polices will typically require that notice of an occurrence, or an event that could result in a claim, be given as “soon as practicable.”

Policyholders failing to comply with notice provisions risk compromising their coverage; however, in many instances, coverage will be forfeited only if the insurer demonstrates that late notice has resulted in prejudice. As such, when policyholders are confronted with denials based on their failure to provide timely notice, they often assert that the insurer must demonstrate prejudice. However, courts may be hesitant to require prejudice in cases that involve claims-made policies because, with claims-made policies, courts may deem notice a “condition precedent” to coverage.

When providing notice, there are certain things that should be done as part of “best practices” to help ensure that there are no issues with notice: (1) provide written notice, unless otherwise required to be provided by some other means, and include a copy of the complaint and summons with the notice if a lawsuit was filed; (2) include a copy of any written claims or demands if received; (3) read the policy immediately for specific notice provisions and make sure to comply with them; (4) provide name and contact information so that the insurer can follow up and if it changes, supplement it; (5) request defense and indemnity coverage and request that all policy obligations be honored; and, (6) ask the insurer to acknowledge receipt.

Send the notice as soon as possible, especially when dealing with a claims-made policy. With an occurrence policy, send it as soon as practicable under the circumstances; but, never assume that it is too late. There are always arguments that can possibly be made as to why even untimely claims should be covered.

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Wisconsin Court of Appeals Reverses $68 Million Judgement in Excess Insurer's Favor

Joseph M. Bucaro

In a case that was first filed in 1989, the Wisconsin Court of Appeals recently held that an excess insurer has a duty to defend only where an occurrence is covered by the excess policy and not covered by the underlying policy. An excess insurer and underlying insurer cannot simultaneously be tasked with the duty to defend. Johnson Controls, Inc. v. Central National Insurance Company of Omaha, No. 2014AP2050, unpublished slip op. (Wis. App. Apr. 25, 2018).

In 1985, Johnson Controls, Inc. was identified as a potentially responsible party for the environmental contamination of several landfills and smelting plants. Johnson Controls notified its primary, umbrella, and excess insurers demanding defense and indemnity coverage under various policies for Johnson Controls’ potential liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA). All of Johnson Controls’ insurers refused to defend or indemnify Johnson Controls for costs under CERCLA, claiming costs under CERCLA were not covered by the policies.

Johnson Controls eventually filed suit against all its insurers for breach of their duties to defend and indemnify. This included a claim against Central National, who was an excess insurer of Johnson Controls.

Initially, the Wisconsin Court of Appeals agreed with Johnson Controls’ insurers that they did not have a duty to defend or indemnify claims arising under CERCLA. This ruling was reversed when the Wisconsin Supreme Court overruled City of Edgerton v. General Casualty Co. of Wisconsin, 184 Wis. 2d 750, 517 N.W.2d 463 (1994), which allowed Johnson Controls to recover for damages incurred under CERCLA. The reversal of the Edgerton ruling ultimately lead to Johnson Controls securing a judgment of $68 million against excess insurer Central National.

Central National appealed the judgment and argued that its duty to defend was limited to occurrences where the excess policy covered the occurrence, and the underlying policy did not. It argued that both the underlying insurance policy and the Central National policy covered claims for costs under CERCLA, and therefore the underlying insurance alone should have the duty to defend. Johnson Controls argued that the court of appeals should look to general concepts about excess insurer coverage from results in other cases, rather than analyze the specific policy language at issue in the case. It cited several cases that held an excess insurer and primary insurer could have simultaneous duties to defend.

The court determined that the analysis of whether an excess insurer has a duty to defend should not be decided based on general concepts about the role of excess insurers, but should be determined by the specific policy language at issue. Since the policy language regarding environmental claims in the Central National policy was the exact same as the language in the underlying insurer’s policy, the court ruled they could not both have a duty to defend simultaneously.

The court of appeals ultimately agreed with Central National and reversed the lower court’s decision. The court stated that either the occurrence was covered by both the underlying and excess policies, in which case the underlying policy had the duty to defend, or the occurrence wasn’t covered by either policy, and Central National would not have a duty to defend.

The Johnson Controls decision confirms again the importance of analyzing the specific policy language at issue. Policyholders should not rely on general concepts about how insurance policies have been applied in the past. Instead, policyholders should ensure the language of policies they hold accurately reflect their insurers’ duties to defend and indemnify. 

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Attorney Highlights

P. Wesley Lambert was elected to the Akron Children’s Museum Board of Directors.

Amanda M. Leffler was awarded the 2018 Read Family Difference Maker Award by Leadership Akron.

Amanda M. Leffler was recognized as a “Notable Woman in Law” by Crain’s Cleveland Magazine.

Amanda M. Leffler spoke on Advanced Issues in Construction Coverage at the Stark County Bar Association seminar on April 20.

Alexandra V. Dattilo was honored as a “Woman Leader in a New Position” by ATHENA Akron.

Alexandra V. Dattilo graduated from the CMBA’s Leadership Academy.

Kerri L. Keller was selected to be a member of Leadership Akron Class 35.

Kerri L. Keller was elected as a member of the Hudson Community Foundation’s Professional Advisor Group.

Save the Date!

Sixth Annual
Insurance Coverage Conference
October 11, 2018

Location:
Embassy Suites Independence
5800 Rockside Woods Blvd.
Independence, OH 44131

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Check out our Construction and Insurance Coverage
Roundtable on Apple Podcasts and Google Play, or by
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Understanding How “Known Loss” or “Loss in Progress” Principles May Limit Available Insurance Coverage

Caroline L. Marks

An issue often facing policyholders, especially those with claims triggering multiple policy periods, is whether the law of the applicable jurisdiction recognizes a “known loss” or “loss in progress” doctrine that limits the number of policies that may respond to a claim, or whether their policies contain provisions that accomplish the same effect. This determination can have a significant impact on the amount of insurance coverage available to a policyholder.

The basic premise of the “known loss” doctrine as articulated in some jurisdictions is that insurance coverage is only permitted for fortuitous events and that insurance may not be obtained or enforced for a loss that the insured either knows of, planned, intended or is aware is substantially certain to occur. “Hence, ‘[t]he concept of insurance is that . . . the carrier insures against a risk, not a certainty.’” Owens-Corning Fiberglas v. Am. Centennial Ins. Co., 74 Ohio Misc.2d 183, 192-93 (Lucas Cty. 1995)(citing to Bartholomew v. Appalachian Ins. Co., 655 F.2d 27, 29 (1st Cir. 1981)). The “loss in progress” doctrine is very similar. “Generally, that doctrine embodies ‘the principle that losses which exist at the time of the insuring agreement, or which are so probable or imminent that there is insufficient “risk” being transferred between the insured and the insurer, are not proper subjects of insurance.’” Am. & Foreign Ins. Co. v. Sequatchie Concrete Servs., 441 F.3d 341, 344 (6th Cir. 2006) (applying Tennessee law), quoting 7 Couch on Insurance § 102.8; see also Inland Waters Pollution Control, Inc. v. Nat’l Union Fire Ins. Co., 997 F.2d 172, 178 (6th Cir. 1993) (applying Michigan law). Not all jurisdictions, however, recognize the “known loss” or “loss in progress” doctrines. See, e.g., Burlington Ins. Co. v. PMI Am., Inc., 862 F.Supp.2d 719 (S.D. Ohio 2012) (applying Ohio law).

Even in those jurisdictions that do not specifically recognize the “known loss” or “loss in progress” doctrine, policyholders’ insurance policies may contain different variations of contractual “known loss” or “loss in progress” provisions of which policyholders should be aware. For example, a policy may contain the following language:

b. This insurance applies to “bodily injury” and “property damage” only if:

* * *

(3) Prior to the policy period, no insured ... knew that the “bodily injury” or “property damage” had occurred, in whole or in part. If [the insured] ... knew, prior to the policy period, that the “bodily injury” or “property damage” occurred, then any continuation, change or resumption of such “bodily injury” or “property damage” during or after the policy period will be deemed to have been known prior to the policy period.

Cases applying policy language identical or substantially similar to this provision generally have done so to preclude coverage under policies issued after first knowledge of the loss, thereby limiting coverage to the policy in effect when the policyholder first knew of the loss. See, e.g., Transportation Ins. Co. v. Selective Way Ins. Co., No. 1:11-CV-01383-RWS, 2012 WL 5605002 (N.D. Ga. Nov. 14, 2012) (holding that the second insurer did not owe any contribution to the first insurer which paid the loss because the insured knew of the trespass claim and the property damage before the second insurer’s policy period commenced); Travelers Cas. & Sur. Co. v. Dormitory N.Y., 732 F.Supp.2d 347, 361 (S.D.N.Y. 2010) (holding that the second policy did not provide coverage because remediation and repair of the damage occurred before the start date of the policy and “[t]o the extent that the Flooring Failure continued or worsened…, [the first insurer which paid the loss] may not recover for that damage because ‘any continuation, change or resumption of such … “property damage”’ [wa]s not covered” under the second policy).

Given the significance of “known loss” and “loss in progress” principles, policyholders would be well-advised to evaluate at the outset whether the applicable jurisdiction’s law recognizes a “known loss” or “loss in progress” doctrine and whether their insurance policies contain similar contractual provisions. By doing so, they can accurately evaluate the amount of available coverage for a claim.

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Reducing Your Risk in the Construction Industry: The Benefits of Being Listed as an Additional Insured

Kalynne N. Proctor

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Insurance Coverage for “Pollution” Claims: Are you Properly Insured?

Alexandra V. Dattilo, Meagan L. Moore

• Pollution Legal Liability Insurance
• Cost Cap Insurance
• Contractor’s Pollution Liability Insurance
• Errors and Omissions Insurance

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Using Indemnity Provisions to Reduce Risk in Construction Projects

Christopher T. Teodosio

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Attorney Highlights

Save the Date!

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The Limitations of Policyholder's Duty to Cooperate

Alexandra V. Dattilo

 Liability insurance policies have historically imposed on policyholders a duty to cooperate with insurers in the defense of actions. More recent policies have expanded this duty, obligating policyholders to cooperate in the investigation of claims as well. Insurers often investigate claims or defend actions under a reservation of rights which can create an adversarial relationship between the policyholder and insurer. As a result, courts have recognized limits on the duty to cooperate; protecting the policyholder’s right to select and control defense counsel and to have confidential, privileged communications with defense counsel regarding matters which could affect the coverage dispute.

In evaluating its obligations, a policyholder should first determine whether the duty to cooperate exists. Most standard form policies — particularly more recent ones — impose such a duty, although certain historic policies may not. If a policy purports to impose a duty to cooperate, then the parties must determine whether the insurer is fulfilling its policy obligations or whether the insurer is in breach.

Insurers can breach their obligations in a number of ways, such as by refusing to defend to the full extent required by the policy and applicable law; by taking positions on trigger, allocation, or deductible/retention issues that are unwarranted; or by issuing an improper denial of indemnity obligations, which would amount to an anticipatory breach. If an insurer is in breach, it cannot insist upon performance by the policyholder of any duty under the policy, including the duty to cooperate. If the policy imposes a duty to cooperate and the insurer is not in breach, then the parties must determine the extent of the duty and any limitations by focusing on the specific language in the policies.

Impact on the Selection and Control of Defense Counsel

Disputes often arise between the policyholder and insurer regarding the parties’ respective rights to select and control defense counsel. When an insurer agrees to defend under a reservation of rights, it generally loses the ability to select counsel, or to control the defense. These limitations on the insurer largely derive from the ethical rules that govern the conduct of defense counsel.

In situations where there is a dispute between the policyholder and insurer, the defense counsel must be careful to identify who is actually the client because this will guide the defense counsel in conducting itself within the rules of professional conduct and ethics. In most jurisdictions, courts have held that when an insurer has reserved rights and/or partially denied claims, the defense counsel’s client is the policyholder, not the insurer. Some of the rules that are particularly important in this situation require that: (1) the client gives informed consent; (2) the third party does not interfere with the attorney’s independence of professional judgment or with the client-attorney relationship; and (3) the information relating to the representation of the client is protected.

Defense counsel owes a policyholder an unqualified duty of loyalty and must at all times protect the policyholder’s interests, without being compromised by an insurer’s instructions. It is important that the attorney exercise independent professional judgment on behalf of his or her client and render candid advice. An attorney’s loyalty to the client cannot be compromised by allegiance to others or by the attorney’s personal interests.

It is not unusual for an insurer to provide defense counsel with certain litigation ‘guidelines’ that test the loyalty, zeal, and independent judgment of such counsel. Further, insurers may insist upon policyholder acquiescence in such guidelines on the basis of policy ‘cooperation’ clauses. Litigation guidelines, however, may impinge improperly upon applicable ethical rules, which are absolute, by attempting to impose restrictions upon the professional judgment of defense counsel. Generally, an attorney may comply with such attempted restrictions only to the extent they do not interfere with the attorney’s independent professional judgment in representing the policyholder and cooperation clauses cannot be used to force policyholders to consent to such ethical violations.

Impact on Privileged Communications

Insurers also may use the cooperation clause to test the limits of the attorney-client privilege between policyholders and their defense counsel. Ethical rules limit the extent to which an insurer may obtain information from defense counsel. As discussed above, when an insurer has reserved rights and/or partially denied a claim, defense counsel can function as counsel only for the policyholder. An attorney cannot reveal confidential information relating to the representation of a policyholder client unless the client gives informed consent or the disclosure is impliedly authorized in order to carry out the representation. Absent such consent or authority, the attorney must maintain in confidence information provided by the policyholder. Correspondingly, an attorney is forbidden from using information relating to representation of a policyholder client to the disadvantage of the client, unless the client gives informed consent.

The privilege analysis is complicated because in some respects an insurer is not a third party, usually in regards to the defense of the underlying claim. However, that common interest does not extend beyond the defense of the underlying claim and, in instances where the information being exchanged relates to the coverage dispute, there may be some issues.

A situation may arise when an insurer files an action seeking a declaration that there is no coverage for a claim and seeks production, based on the policy’s cooperation clause, of documents generated during the investigation of the underlying case. In these situations, courts have generally held that as long as the documents relating solely to the underlying claim are produced, then the duty to cooperate under the insurance policy has been fulfilled. Courts consistently have held, however, that policyholders need not produce documents or other communications concerning legal advice or other information transmitted with a reasonable expectation of confidentiality, such as communications between policyholders and their defense counsel relating to coverage disputes.

Conclusion

         Cooperation clauses are common in liability insurance policies. Although it is important for both policyholder and insurer to review such clauses carefully to determine their precise, expressed scope, it also is important for the parties to recognize that ethical rules and decisional law may serve to limit the stated scope of any duty to cooperate.

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Sexual Harassment in the Workplace - Are You Covered?

Kerri L. Keller

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Commercial Real Estate Due Diligence: Premises Environmental Insurance Options

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Q & A: Cease and Desist

Anastasia J. Wade

Q: I received a cease and desist letter regarding my use of a competitor’s trademark. Should I give notice to my insurance company?

Lawyer answer: It depends on your policy language. Practical answer: Yes. As advertising injury insurance has evolved, insurance companies have imposed additional requirements on policyholders to preserve coverage. One of these requirements is giving the insurance company notice of the potential for a claim, even if coverage is not yet triggered and the claim may never come to fruition. That is what one policyholder discovered in the recent case of Allstate Insurance Co. v. Airport Mini Mall, LLC, Case No. 1:15-CV-3086, 2017 WL 4280628 (N.D.Ga. Sept. 25, 2017). Although the court held that the policyholder was not entitled to coverage under the terms of the policy, the court continued its analysis and concluded that, even if the claim was covered, the policyholder failed to give timely notice when it received a cease and desist letter six months prior to the date the lawsuit was filed and that delay relieved the insurer of any duty to defend. The policy required the policyholder to give notice “as soon as practicable of an ‘occurrence’ or an offense which may result in a claim.” The court determined that this was a condition precedent to coverage and required the policyholder to give notice at the first indication of the potential for a claim. The cease and desist letter, according to the court, indicated a potential for liability related to an occurrence under the policy and the six-month delay between receiving the letter and providing notice to the insurance company was not “as soon as practicable,” as required by the policy. To the extent adopted by other courts, the decision imposes an additional burden on policyholders. Companies in highly competitive markets or that host third-party sellers may receive many cease and desist letters that are unsubstantiated and will never result in actual litigation. Requiring them to provide notice to their insurance company each time they receive a cease and desist letter could be a heavy burden in some instances. It is, however, a burden that some policyholders may need to meet to preserve coverage for their claim. Policyholders, of course, may be able to argue that certain cease and desist letters can’t reasonably be understood to “result in a claim.” And policyholders in most jurisdictions may still argue that the insurer has not been prejudiced by the timing of the notice, thus preserving coverage. Nevertheless, the best approach is to give notice to the insurer every time you receive a cease and desist letter to avoid a defense of late notice from the insurer.

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Attorney Highlights

Christopher J. Carney, Clair E. Dickinson, Meagan L. Moore and Paul A. Rose were named to the Best Lawyers in America 2018.

Lucas M. Blower, Bridget A. Franklin, Kerri L. Keller, P. Wesley Lambert, Amanda M. Leffler, Paul A. Rose and Anastasia J. Wade spoke at the Brouse McDowell 2017 Annual Insurance Coverage Conference on October 12, 2017 at Embassy Suites in Independence, Ohio.

P. Wesley Lambert spoke at the NBI Seminar titled “Construction Law: Advanced Issues and Answers” on December 5, 2017 in Cleveland, Ohio.

Kate M. Bradley, Christopher J. Carney, Kerri L. Keller, P. Wesley Lambert, Amanda M. Leffler, Caroline L. Marks and Paul A. Rose were listed as 2018 Super Lawyers®through a peer- andachievement-based review conducted by the research team at Super Lawyers, a service of Thompson Reuters legal division.

Lucas M. Blower, Alexandra V. Dattilo, Gabrielle T. Kelly, Meagan L. Moore and Anastasia J. Wade were named 2018 Ohio Super Lawyers® Rising Stars™through a peer- andachievement-based review conducted by the research team atSuper Lawyers, a service of Thompson Reuters legal division.

Amanda M. Leffler was named in the Top 100: Ohio, Top 50: Cleveland, Top 50: Women Ohio and Top 25: Women Cleveland Super Lawyers Top List for 2018.

Alexandra V. Dattilo and Meagan L. Moore spoke at the Akron Bar Association Insurance Coverage Seminar titled “Environmental Liability Insurance: The Risks You Never Considered” on December 15, 2017.

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Insured’s Response to Disaster Recovery: A Forensic Accountant’s Perspective

By Jim Paskell

When Disaster Strikes

What do you do when you hear, “We had a fire.”? Too often, businesses focus on insurance as their primary recovery option. However, as an insurance specialist, my advice is: Don’t rely on insurance. Certainly, insurance coverage will be a critical component of the solution. However, an insured should always address their safety and other business issues first. In my experience, the businesses that attack the problem immediately as if they had no insurance achieve the best results both for long-term viability of the business and for procuring insurance recovery.

Teamwork in these situations is crucial. As a first step in the recovery process, assemble senior leadership and relevant personnel to implement your disaster recovery plan. If you are one of the many businesses without such a plan, this provides the impetus to create one. Together, brainstorm ways to minimize the loss of property and business income. Proactively consider every aspect of operations and identify steps to mitigate loss as quickly as possible at the impacted location, on overall production and sales, and for customer/supplier relations. Codify this into a solid response plan and clearly assign roles and responsibilities. Depending on the business/situation, your plan will likely include the following:

• Precautions:
  • to ensure safety of personnel and others; and
  • to prevent further property damage.
• Assessment/quantification of options for:
  • moving operations and/or production to other locations;
  • depleting inventory to maintain sales; and
  • obtaining goods or materials from competitors.
• Procedures to communicate with customers, suppliers, and distributers.
• Steps to begin repair process as soon as possible.

This planning should include representatives from all facets of the business: manufacturing, supply-chain, management, sales/marketing, legal, and accounting. Each will have a valuable role to play. At this stage, the accounting role is to crunch numbers to inform decision-making on questions such as:

• How will moving production or operations impact sales?
• How can inventory best be utilized to minimize loss or expense?
• What are the costs and benefits of specific steps?
• Where can we save costs?
• And, last but not least, will our insurance policy pay for these recovery activities?

Working With Your Insurer

Unfortunately, insureds often discover at these crucial junctures that the insurance process may not be as they expected. On the one hand, insurance was purchased for just such circumstances, and the insurer is now a business partner and crucial member of your disaster recovery team. Insurance proceeds are often critical to funding property restoration and providing crucial cash-flow throughout the process. On the other hand, the insurer is a separate business entity, and adjusters represent the carrier, not the insured. As in any business relationship, there will be times when each party’s interests are aligned, and times when they are not. Therefore, the claim process can be cooperative, or it can be contentious, and often it is both. So what steps can insureds take to make their carrier a partner, not an adversary, in this process?

The insured and insurer carry the same significant risk, and therefore the same common interest: helping the insured recover from the disaster as quickly and cost-effectively as possible. That is why a business response without consideration of insurance is essential: by overcoming the loss through planning and operations, the insured minimizes the dollars it risks in an insurance claim, while simultaneously minimizing the carrier’s risk of shouldering that financial burden. Achieving a working partnership often makes the difference between a cooperative, successful process and a contentious, unsatisfying result.

The forensic accountant can assist in accomplishing the twin goals of minimizing risk while achieving a working partnership with its carrier as follows:

1. Understand the insured’s policy. During the planning process, someone should review the policy carefully to inform decision making. For example, if the recovery plan involves shifting production/personnel to a temporary location, you should know if the corresponding expenses are covered while planning, not learn about coverage–or denial–during the claim process. Understanding coverage, limits/sublimits, deductibles, and exclusions for property repair, extra expense, and business income allows the insured to make savvy business decisions and avoid unwelcome surprises during the claim process.
2. Communicate with the carrier. The insured best knows its business and how to overcome disaster; the carrier best knows the policy coverage. Conflict can result if an important component of the recovery plan is not covered. While the carrier won’t be included in initial planning discussions, informing the carrier of your recovery plans and confirming coverage is an extremely effective way to facilitate recovery and minimize claim issues. Also, proactive communication can prevent delays in obtaining needed proceeds to fund the restoration.
3. Submit a credible claim. A claim is a transaction; the insurer has the money and a contract (policy) obligating them to pay the insured subject to the terms and conditions of that policy. As in any transaction, the insurer will not pay unless the policy terms are met. Therefore, the insured carries the burden of proving the loss under that policy. If the insured does so, the carrier will pay; if not, it will not.

As policies state, the insurer has the right to verify coverage, loss measurement, and that funds paid are used for business recovery. The carrier will likely retain a forensic accountant to examine business records, perform interviews, and otherwise prove those facts. Inaccurate, poorly-documented claims only serve to raise carrier suspicions and harm the insured’s credibility, undermining any goodwill. Therefore, the insured should take the following steps to make the carrier a partner in the recovery process:

• Establish accounting procedures to accurately capture loss activity, including supporting documentation;
• Bucket costs by coverage element and appropriately calculate and apply limits, deductibles, and exclusions;
• Provide contemporaneous support for the loss and recovery activities;
• Proactively address measurement issues that arise in virtually every business interruption claim: period of restoration, but-for revenue, saved expenses, market conditions, and make-up sales.

Jim Paskell is the founder and president of the national consulting firm Litigation and Liability Management, LLC, based in Cleveland, Ohio.

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Policyholders May Forfeit Coverage by Failing to Allocate Between Covered and Uncovered Claims

Caroline L. Marks

Policyholders need to be aware of their obligations, at least in some jurisdictions, to allocate amounts between covered and uncovered claims, because, if they do not, they risk their insurers being relieved, entirely, from paying under their policies. A recent decision from the United States Second Circuit Court of Appeals demonstrates the potential peril of not allocating between covered and uncovered claims. Uvino v. Harleysville Worcester Ins. Co., Nos. 16-3225-cv(L) & 16-3356-cv(XAP), 2017 WL 4127538 (2d Cir. Sept. 19, 2017).

Uvino v. Harleysville Worcester Ins. Co.

In this case, the Uvinos sued their construction manager, alleging that it had breached the parties’ contract and negligently damaged their property. The construction manager’s insurer, Harleysville, defended the construction manager under a reservation of rights. Before trial, Harleysville moved to intervene in that action in order to submit special interrogatories to the jury to allocate damages between the uncovered claims relating to the repair and replacement of the construction manager’s own work and the covered claims involving damages to other property. The construction manager, however, successfully opposed Harleysville’s motion to intervene, and special interrogatories were not submitted to the jury. The jury eventually entered a general verdict in the Uvinos’ favor in an amount in excess of $400,000.

Thereafter, the Uvinos commenced a declaratory judgment action against Harleysville in an attempt to collect the judgment entered against its insured, the construction manager. The trial court, however, entered summary judgment in favor of Harleysville. On appeal, the Second Circuit affirmed, applying New York law and holding that the Uvinos failed to meet their burden to show which portions of the jury award were covered by the policy, and, therefore, Harleysville had no obligation to pay any portion of the judgment. In reaching its holding, the Second Circuit declined to shift the burden to the insurer because the Uvinos and the construction manager were fully aware of the allocation issue based on Harleysville’s unsuccessful motion to intervene, and the Uvinos had ample opportunity in the underlying and coverage actions to allocate the damages, but failed to do so.

The Uvino decision itself leaves open the possibility that the Second Circuit would shift the burden of proof on allocation to the insurer had the facts of the case been different. For example, the Court arguably would have shifted the burden to Harleysville had it not attempted to intervene in the underlying case and had it otherwise failed to bring the allocation issue to the Uvinos’ and the construction manager’s attention.

Takeaways

Generally, it is important for policyholders to recognize that different jurisdictions decide the allocation issue differently. Some jurisdictions, for instance, shift the burden of proof to the insurer when the insurer wrongfully refuses to defend, or when the insurer, while providing a defense, fails to timely raise the allocation issue with its insured. If the insurer has the burden of proof and fails to satisfy it, the insurer would pay the entire unallocated amount of the judgment. Given the differences in the law on the allocation issue and its significant impact on coverage outcomes, policyholders would be well-advised to understand the law of their jurisdiction and to position themselves in a way to maximize recovery under the applicable law. 

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Can You Settle Your Third-Party Claim While in Coverage Purgatory?

P. Wesley Lambert

Most commercial general liability (CGL) policies grant control over the defense and settlement of third party claims to the insurer. Thus, the right to settle, or not settle, a third-party claim against the policyholder resides with the insurer. However, when an insurance company breaches its policy, for example by wrongfully refusing its duty to provide a defense to its policyholder, the policyholder may settle the claim against it without securing the insurer’s consent. Sanderson v. Ohio Edison Co., 69 Ohio St. 3d 582, 635 N.E.2d 19 (1994). Conversely, when the insurance company is honoring its defense obligation, even under a reservation of rights to later contest coverage, the policyholder must respect the policy’s grant of control of the settlement process to the insurer or risk losing coverage for any settlement reached without the insurer’s consent.

But, what happens when the insurer is providing a defense to the insured, and thus technically complying with the policy’s terms, yet has made it clear that it will not actually indemnify the policyholder for any settlement or judgment? These situations leave the policyholder in a sort of coverage purgatory – it is receiving the defense coverage it bargained for, but not the indemnity coverage. Policyholders may want to resolve the claims against them in order to limit their liability, but may also be afraid that doing so will result in a forfeiture of coverage for the settlement amount.

Fortunately, courts have constructed an alternative path for policyholders stuck in these situations, holding that insures may not leave their policyholders in limbo by controlling the policyholder’s defense but unequivocally refusing to indemnify the policyholder for any settlement or judgment. In Ward v. Custom Glass & Frame, Inc., 105 Ohio App.3d 131 (8th Dist. 1995) and Patterson v. Cincinnati Ins. Cos., 2017-Ohio-2981, 2017 WL 2291605 (8th Dist. Aug. 22, 2017), the Eighth District Court of Appeals held that when an insurer clearly indicates that it will not indemnify the policyholder, the policyholder is relieved from the obligation to secure the insurer’s consent prior to settling the claim against it.

In both cases, the policyholder was subject to a third-party claim that the insurer had agreed to defend. However, the insurer in both cases stated, in no uncertain terms, that it would not indemnify the policyholder if there were a judgment against it. Thus, the insurance companies maintained that they had the right to control the policyholder’s defense, and its ability to settle the claim, but that it would not actually fund any settlement or ultimate judgment. The policyholder, left with no other option, settled the claim itself, while at the same time keeping the insurer apprised of the settlement negotiations.

The insurers in both cases argued that the policyholder’s disregard of the policy’s consent to settle provision relieved the insurers from the obligation to cover the settlements. Both courts disagreed. The Ward court was particularly critical of the insurer’s conduct, holding that “[w]hen an insurance company refuses to provide coverage and at the same time seeks to maintain control of the same litigation, it . . . creates a frustration of purpose. Such conduct would compel a person of reasonable faculties to cut his costs and settle a lawsuit to avoid the possibility of a higher judgment.” Ward, 105 Ohio App.3d at 137. Thus, when an insurance company maintains that coverage does not exist, it “must make a clean break from the case and should not subject the insured to a guessing game or by its conduct cause the insured to incur more expenses than necessary.” Id. The Patterson similarly noted the “frustration of purpose” created when the insurer controls the defense of an action while at the same time disclaiming its duty to indemnify. Patterson, 2017-Ohio-2981 at ¶30.

Thus, policyholders trapped in coverage purgatory may look to Ward and Patterson for support when deciding whether they may settle a case against them without violating their policy’s consent to settle provision. It is important to note, however, that in both cases the policyholder kept the insurer apprised of the settlement negotiations and offered them the opportunity to remain involved in the process. While it is unclear whether this impacted the courts’ analysis of the case, policyholders would be well-advised to keep the lines of communication open with their insurer despite the ostensible breach of the policy’s indemnification obligation. 

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Q&A: Additional Insured Coverage

Gabrielle T. Kelly

Question: My contract has a provision requiring the other party to include me as an additional insured on its policies. Do I need to do anything else to ensure that I have coverage if a claim arises?

Answer: Having an agreement that details the other party’s obligation is a great start, but it does not guarantee that the insurance will be available and contain the terms that you requested. The first step to ensuring that you have the coverage that you bargained for is to obtain a copy of the policy containing the additional insured (AI) endorsement or broad coverage language.

Certificates of Insurance

It is not advisable to settle for receiving a Certificate of Insurance. The Certificate does not guarantee that the insurance company has added you as an additional insured; only that the broker intended to add you to the policy. Further, if there are any discrepancies between the coverage listed on the Certificate and the terms of the policy, the latter will control. In fact, Ohio Revised Code section 3938.02 explicitly states, “A certificate of insurance is not a policy of insurance and . . . shall not confer to any person new or additional rights beyond what the referenced policy of insurance expressly provides.” Accordingly, an AI cannot rely on a Certificate of Insurance as evidence of coverage for a claim.

Additional Insured Endorsements

The next step is to review the policies. Additional insured endorsements vary greatly and it is imperative to confirm that the language provides the coverage that the parties intended. The endorsement may be very specific, and explicitly state that it provides coverage only to the person or company listed. The endorsement could specify a category of persons that is added as additional insureds (e.g. managers of premises), and contain a test for determining if a party falls within the AI endorsement. Lastly, the policy endorsement may be a “blanket additional insured” endorsement that provides coverage to any party to whom the named insured is contractually required to provide coverage. As long a party falls into one of these three categories, it will be recognized as an AI under the policy.

Coverage Limitations

However, the examination is not complete even when a policy provides AI status. Insurers have attempted to narrow the coverage provided to additional insureds with various restrictions, such as time limits and causation requirements. Some policies contain provisions stating that the AI benefits will exist only for the time specified in the contract. Insurers write these provisions in such a manner that they can avoid providing coverage after a project is completed.

Insurers also attempt to restrict coverage to the AI only if the bodily injury or property damage results from the negligence of the named insured. Courts have interpreted this language as precluding coverage to an AI except when the evidence establishes that the named insured acted negligently and caused the loss. This may be contrary to the requesting party’s understanding of its AI coverage. Therefore, it is important to review the policy to determine whether there are any limitations to the AI status or insurer’s defense obligation.

Lastly, if the project or relationship spans longer than the initial policy period, confirm with the other party that you are an AI on subsequent policies. The last thing you want to do is wait until after a loss has occurred to determine the availability of insurance. If you are unsure about your AI status or the level of coverage you are receiving, contact coverage counsel for a policy review and recommendation.

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Attorney Highlights

Kerri L. Keller was appointed to the board of directors of the Federal Bar Association, Northern District of Ohio Chapter.

Amanda M. Leffler was appointed for a second-term as an editor of the IRMI CGL Reporter.

Kerri L. Keller has been named co-chair of the Civil Rules Committee of the Advisory Group for the U.S. District Court for the Northern District of Ohio.

Gabrielle T. Kelly was selected as a trustee for the Cleveland Metropolitan Bar Association.

Bridget A. Franklin and Lucas M. Blower spoke at the OSBA’s Insurance Law seminar on October 17, 2017, on Recovery for Non-Policyholder: Insured Contracts, Additional Insured, Assignments, and Judgment Creditors.

Amanda M. Leffler spoke on construction-related insurance issues at Cleveland Metropolitan Bar Association’s Real Estate Law Institute on November 10, 2017.

Upcoming Events

Gabrielle T. Kelly and P. Wesley Lambert are presenting at the NBI seminar titled “Construction Law: Advanced Issues and Answers” on December 5, 2017 (Cleveland) and December 8, 2017 (Akron).

Meagan L. Moore and Alexandra V. Dattilo are presenting “Environmental Liability Insurance: The Risks You Never Considered” and Anastasia J. Wade is presenting “IC for IP: Insurance Coverage Issues for Intellectual Property Cases” on December 15, 2017, at the Akron Bar Association’s Annual Advanced Issues in Insurance Law seminar.

Gabrielle T. Kelly is speaking at the NBI seminar titled “Negotiating Claims with Insurance Companies” on December 20, 2017.

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It's Tradition! Pollution Exclusion Applies Only to Traditional Environmental Contamination: New Cases from Washington and Connecticut

Lucas M. Blower

In general, a pollution exclusion precludes coverage for liabilities arising from the “discharge, dispersal, release or escape” of “irritants, contaminants or pollutants.” The exclusion was incorporated in commercial general liability (CGL) insurance policies in response to the massive environmental liabilities incurred by companies in the 70’s and 80’s.

And the exclusion has been effective, by in large, in precluding coverage for liabilities that are the result of traditional environmental contamination. But, for some insurers, that was not enough. These insurers argued that the pollution exclusion leaches out in new directions, applying not only to traditional environmental contamination, but extending to apply in new, non-pollution contexts as well.

For example, in Andersen v. Highland House Co., 93 Ohio St. 3d 547, 757 N.E.2d 329 (2001), the insurers relied on the pollution exclusion to deny a claim based on carbon monoxide poisoning in an apartment—hardly the sort of widespread environmental damage first envisioned by the pollution exclusion. The insurer nonetheless argued that the pollution exclusion applied because carbon monoxide was a “pollutant,” which the policy defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke vapor, soot, fumes, acids, alkalis, chemicals and waste.” Id. at 548. The Ohio Supreme Court, however, disagreed, holding that the pollution exclusion would not apply because it did not “specifically, and unambiguously state that coverage for residential carbon monoxide poisoning is excluded.” Id. at 548. According to the Court, the pollution exclusion was limited to situations involving “traditional environmental contamination.” Id. at 552.

While insurers have been rebuffed in their efforts to expand the scope of the pollution exclusion in Ohio, in other states, they continue to push at the edges of the pollution exclusion, hoping to spread its reach past the confines of traditional environmental contamination. But, in two recent cases—from Washington and Connecticut—the courts rightly halted the insurer’s attempts to expand the exclusion.

The recent decision from Washington’s Supreme Court, in Zhaoyun Xia v. ProBuilders Specialty Ins. Co. RRG, 393 P.3d 748, 750 (Wash. 2017), mirrors Andersen in the facts, and reaches the same conclusion, but by a slightly different route. The underlying claim in Xia was based on the “negligent installation of a hot water heater that led to the release of toxic levels of carbon monoxide in a residential home.” The insurer denied the claim based on the pollution exclusion.

In interpreting the pollution exclusion, the Xia court, similar to the Andersen court, recognized that the pollution exclusion should only apply when the underlying cause of alleged liability “stems from either a traditional environmental harm or a pollutant acting as a pollutant.” Id. at 753. Unlike the Andersen court, however, the Xia court found that the carbon monoxide poisoning could be characterized as pollution. Still, the Xia court found that the insurer’s interpretation of the pollution exclusion violated Washington’s efficient proximate cause rule. Under that rule, a loss is covered, even if there are uncovered events within the causal chain leading to that loss, so long as the initial event—or the “efficient proximate cause”—is a covered peril. In Xia, the court found that the efficient proximate cause of the loss was the negligent installation of the hot water heater, which was covered. Accordingly, the pollution exclusion did not apply.

In Connecticut, likewise, an appellate court addressed a case where the insurer was arguing for an expansive version of the pollution exclusion. In R.T. Vanderbilt Co., Inc. v. Hartford Accident & Indem. Co., 156 A.3d 539 (Conn. App. 2017), the policyholder was accused of mining and selling industrial talc that contained asbestos, which allegedly injured a host of claimants. The policyholder submitted a claim based on the lawsuits to its insurers, which denied the claims, in part, based on the pollution exclusion. The Connecticut appellate court disagreed with the insurers’ interpretation of the exclusion after an exacting review of the policy language. According to the court, the “policy language, when read as a whole, is intended to exclude coverage only for traditional environmental pollution, such as the intentional disposal or negligent release of industrial and other hazardous waste into the public air, land, or water resources.” Id. at 638. Since talc mining didn’t count as traditional environmental pollution, the court held that the pollution exclusion did not apply.

These two cases, and many others like them, should give insurers pause when they argue for a broad application of the pollution exclusion in non-traditional settings. Even if the terms in the pollution exclusion, standing alone, may seem broad enough to encompass ever new risks, the courts have rightly decided that they will not read the terms of the pollution exclusion standing alone. Rather, courts will continue their long-standing practice of interpreting the pollution exclusion solely within the limited context in which it was written. It’s tradition.

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Coverage for Construction Defects Caused by Subcontractor Work

Amanda M. Leffler

The Ohio Supreme Court has held that claims for the cost to repair an insured’s own defective work are not covered because they “are not claims for ‘property damage’ caused by an ‘occurrence’ under a [CGL] policy.” See Westfield Ins. Co. v. Custom Agri Sys., Inc., 2012-Ohio-4712. In its decision, however, the Court approved of prior Ohio case law which held that consequential damages arising from a policyholder’s defective work generally are covered by CGL policies. Since Custom Agri, insurance practitioners and courts in Ohio have generally agreed that:

• Repair and replacement of a policyholder’s own defective work is not “property damage caused by an occurrence” and is not covered by standard CGL policies; and,
• Consequential damages to property other than the policyholder’s work is “property damage caused by an occurrence” and may be covered by a standard CGL policy depending upon the applicability of the policy’s exclusions and conditions.

Importantly, the Custom Agri Court did not address whether a typical CGL policy would provide coverage for the repair or replacement of defective work performed by the policyholder’s subcontractors. A recent decision from one of Ohio’s appellate courts suggests that defective work performed by a policyholder’s subcontractors may be covered, regardless of whether the subcontractor’s work caused any consequential damages.

In 2008, Ohio Northern University contracted with Charles Construction Services (CCS) to construct a hotel and conference center. Ohio Northern Univ. v. Charles Constr. Servs., Inc., 2017-Ohio-258 (3rd Dist.). CCS retained several subcontractors to complete the work. After construction was completed, Ohio Northern discovered significant water intrusion and related damages, as well as serious structural defects, and brought suit against CCS.

CCS tendered the claim to its insurer, Cincinnati Insurance Company, which argued that it had no obligation to defend or indemnify CCS. Cincinnati contended that, under Custom Agri, property damages arising from defective work could never constitute an occurrence, regardless of who performed the work. In response, CCS argued that Custom Agri was inapplicable because almost all of the work at issue had been performed by subcontractors, not by CCS, and because CCS had purchased products-completed operations coverage which applied to the defective construction claims arising from the work of its subcontractors.

The trial court granted summary judgment to Cincinnati, but the Third District Court of Appeals reversed. In finding in favor of CCS, the appellate court analyzed the “Damage to Your Property” and “Damage to Your Work” exclusions, which expressly preserved coverage for damaged work or damages arising from faulty work if (1) the work was performed by a subcontractor, and (2) the damage occurred after construction was completed. The appellate court correctly noted that if it were to adopt Cincinnati’s interpretation of the policy, it would render these provisions meaningless. The court found that, at a minimum, the provisions created an ambiguity that must be resolved in favor of the policyholder. Thus, the appellate court held that Cincinnati had a duty to defend and indemnify CCS.

Interestingly, though not analyzed by the appellate court, even if the work at issue had been performed by CCS and not its subcontractors, the damages alleged by Ohio Northern would have required that Cincinnati defend CCS and indemnify at least a portion of any award against it. This is because Ohio Northern asserted claims not only for the repair and replacement of defective work, but also for consequential damages arising from such work. As noted above, the Supreme Court in Custom Agri cited with approval prior lower court opinions, which held that CGL policies cover such claims for consequential damages.

Insurers and policyholders in Ohio continue to test the scope of the Ohio Supreme Court’s decision in Custom Agri. As in any case involving complex coverage analysis, policyholders should consider retaining experienced coverage counsel to assist in the claim process so as to best position their claim for coverage.

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D & UH-OH: Deepening Insolvency May Be a Prior Wrongful Act, Barring Claims for Post-Policy Fraudulent Transfers

Bridget A. Franklin

Some “D&O policies” (Directors and Officers liability policies) exclude claims for losses “arising out of” the prior wrongful acts of officers or directors. The Eleventh Circuit recently interpreted the phrase “arising out of” broadly, finding that it is not a difficult standard to meet. Zucker for BankUnited Financial Corp. v. U.S. Specialty Insurance Co., -- F.3d -- ,
2017 WL 2115414, *7 (2017) (determining that under Florida law “‘arising out of’ . . . has a broad meaning even when used in a policy exclusion”); but see Brown v. American Intern. Group, Inc., 339 F. Supp. 336, 346 (D. Mass. 2004) (collecting cases in support of its holding that “arising out of” should be “more strictly interpreted when used to define exclusions from coverage.”). In Zucker, the Chapter 11 bankruptcy trustee filed an action against the debtor bank’s D&O insurer for its failure to pay claims related to fraudulent transfers that occurred during the policy period.

By way of background, in 2008, after some investigation and the collapse of the financial market, BankUnited Financial Corporation (“BankUnited”) and its subsidiary BankUnited, FSB (the “Subsidiary”) admitted to engaging in “unsafe and unsound practices,” including risky subprime lending. Unsurprisingly, these practices rendered both banks insolvent. Notwithstanding these admissions, in November 10, 2008, BankUnited obtained a D&O Policy with a Prior Acts Exclusion, opting to forego the higher premium policy without the exclusion.

In early 2009, while still insolvent, BankUnited’s officers approved $46 million in transfers to the Subsidiary bank (“Transfers”). In May of 2009, the Subsidiary was seized by the FDIC and BankUnited filed for Chapter 11 bankruptcy protection. The bankruptcy trustee sued the officers for, among other things, breach of fiduciary duties for authorizing the Transfers. The trustee alleged that the Transfers were in violation of Florida’s Uniform Fraudulent Transfers Act (“UFTA”) in part because they were made while BankUnited was insolvent. The claims were tendered to and denied by the D&O insurer. The officers and trustee entered into a settlement agreement, assigning the officers’ insurance claims to the trustee.

In Zucker, the trustee alleged that the insurer was liable under the D&O policy because the Transfers, or wrongful acts, were made after the policy date. The court disagreed. Interpreting “arising out of” broadly, the court determined that the officers committed multiple wrongful acts prior to the policy date that rendered BankUnited insolvent. Although the Transfers occurred during the policy period, the court held that Transfers were only fraudulent under the UFTA because BankUnited was insolvent at the time, and the insolvency was a result of the prior wrongful acts of the officers.

The court was particularly bothered by BankUnited’s “economical” decision to forego a policy without the Prior Acts Exclusion while aware of its insolvency. Although not all courts will interpret “arising out of” as broadly as the Eleventh Circuit, as a precaution, when a company is insolvent or is on the verge of insolvency, the company should, in the very least, pay the higher premium to obtain stronger protection for the acts of its officers and directors.

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He Madoff With All My Money: Is there Insurance Coverage for Ponzi Schemes?

Anastasia J. Wade

In late May, 2017, HBO released the movie The Wizard of Lies, chronicling the discovery of the Bernard L. Madoff Ponzi Scheme. Literally robbing Peter to pay Paul, Madoff ran his fraud scheme for decades, amassing almost $65 billion in investments before he was caught in December, 2008. As a result of his arrest and the discovery of the fraud, individual investors, hedge funds, charities, and businesses discovered that their money was gone. Unable to reclaim their investments from Madoff or his insolvent companies, many turned on their investment firms and banks to recover at least some of their losses. In turn, these institutions scoured their insurance policies looking for any avenue of potential coverage for both their defense in the lawsuits and any resulting monetary award.

While there may be other sources of coverage available, many of the insurance cases resulting from Ponzi schemes focus on these three areas of coverage: Directors and Officers Liability Policies, Errors and Omissions/ Professional Liability Policies, and Fidelity Bonds.

Directors and Officers Liability Policies
Directors and Officers Liability Policies (“D&O policies”) are designed to protect corporations and directors and officers from liability for decisions made on behalf of the corporation. If the policy is triggered and provides coverage, however, D&O policies often have combined limits for defense costs and indemnification costs, meaning that as litigation against the director or officer drags on, the costs of defense decrease the total amount available for recovery once a final judgment is issued. Moreover, common policy exclusions can prevent an investor’s ultimate recovery. If the policy excludes coverage for fraud and/or money laundering, the insurer will likely be required to provide defense costs to the director or officer until there is a final judgment, but will not be required to provide indemnification in the event the court concludes that the director or officer is liable for fraud or money laundering. See Pendergest-Holt v. Certain Underwriters at Lloyd’s of London, 600 F.3d 562 (5th Cir. 2010). More recent exclusions prevent any coverage for Ponzi schemes, including for losses arising out of a company’s insolvency, which is how Ponzi schemes are often discovered, or losses attributable to the rendering of professional services, in which directors or officers are often engaged when recommending investment in a Ponzi scheme. See Associated Community Bancorp, Inc. v. The Travelers Cos., Inc., Case No. 3:09-CV-1357, 2010 WL 1416842 (D. Conn. April 8, 2010).

Errors and Omissions/ Professional Liability Policies
Errors and Omissions liability policies (“E&O policies”) and professional liability policies provide coverage for losses arising out of the provision of professional services. Like D&O policies, coverage of losses from a Ponzi scheme under these policies will often turn on the applicability of an exclusion; and one popular exclusion among these policies is for claims resulting from violations of state or federal securities laws. Whether there is coverage for the underlying lawsuits resulting from a Ponzi scheme depends on whether there is a separate, stand-alone negligence action, apart from a securities violation claim, that can trigger coverage under the policy. Compare Endurance Am. Specialty Ins. Co. v. Brown, Miclette & Britt, Inc., Case No. H-09-2307, 2010 WL 55988 (S.D. Tex. Jan. 4, 2010) with Hiscox Dedicated Corporate Member Ltd. v. Partners Commercial Realty, L.P., Case No. H-08-3411, 2009 WL 1794997 (S.D. Tex. June 23, 2009). Additionally, for employees acting without company approval, some E&O and professional liability policies preclude coverage for losses resulting from “unapproved” sales, meaning that there would be no potential coverage if the company did not approve of the investment in the Ponzi scheme and the employee continued with the transaction. See Smith v. Continental Cas. Co., 347 Fed. Appx. 812, 2009 WL 3214234 (3d Cir. Oct. 8, 2009).

Fidelity Bonds
The primary purpose of a fidelity bond is to protect a company from an employee’s dishonest conduct. See Fidelity National Financial, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2014 WL 4909103 (S.D. Cal. Sept. 30, 2014). Sometimes, this protection can also extend to the company’s outside agents such as Madoff, who ran his own, separate company and acted alone in his dishonest acts. In Jacobson Family Investments, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 129 A.D.3d 556 (N.Y. 1st. Dep. 2015), the remaining plaintiff, MDG 1994 Grat, LLC (“MDG”) sought to recover for losses arising from the investment of MDG’s assets with Madoff. The fidelity bond provided coverage for “loss resulting directly from the dishonest acts of any Outside Investment Advisor, named in the schedule below, solely for their duties as an Outside Investment Advisor.” Madoff was listed as an Outside Investment Advisor in the schedule for the bond and the loss was a result of Madoff’s dishonest acts. As a result, the lower court found that the bond provided coverage for the loss.

The appellate court, however, reversed the trial court’s decision based on the requirement that the loss must result “solely” from Madoff’s duties as an Outside Investment Advisor. Because Madoff also served as a securities broker at the same time he was an investment advisor, the appellate court reasoned that the loss suffered by MDG was not solely a result of Madoff’s duties as an Outside Investment Advisor and, thus, did not fall under the coverage of the bond. The court also noted that an exclusion for losses resulting from dishonest acts of a non-Employee securities broker would also prevent coverage in this case. See also United States Fire Ins. Co. v. Nine thirty FEF Investments, LLC, 132 A.D.3d 413 (N.Y. 1st Dep. 2015).

Investing in the market is always a risk. As such, there are very few sources of insurance coverage for any resulting losses. When someone improperly manipulates the system through a fraudulent scheme, however, there may be some coverage available. The possibility and extent of such coverage will depend on the particular policy language implicated by the claim. In the case of lawsuits resulting from Ponzi schemes, coverage will often depend on who is named in the lawsuit, what role he played in the scheme and the nature of the allegations against him. In any case, investors in Ponzi schemes will likely face a long road to recovery.

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Attorney Highlights

Kerri L. Keller was appointed to the City of Hudson Income Tax Board of Review

Gabrielle T. Kelly spoke at the CMBA Insurance Law Seminar on June 9, 2017 on The Law’s Response to Phishing and Social Engineering Schemes

Wes Lambert graduated from the Leadership Hudson Class of 2017

Wes Lambert and JoZeff Gebolys published an article for the American Bar Association titled “Coverage for Construction Defect Claims May Hinge on a Clearly Defined Scope of Work” (June 27, 2017)

Wes Lambert published an article for the American Bar Association titled “When It Comes to Coverage for Cyber Crime Losses, Is Your Loss ‘Direct’ Enough?” (April 28, 2017)

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A Matter of When Not If – An Equipment Failure Policy Could Help Tame the Unpredictable

By Andrew Rowles

Imagine a late summer day, it is 90 degrees and 100% humidity. From inside your office you hear a loud bang as a pole top transformer explodes just down the street from your building. Not much of a concern, until seconds later an artificially generated power surge comes through the overhead utility service line, taking out your second leg power feed for production equipment, shorts out the $11,000 rooftop air-conditioning unit, and you lose power. Almost instantly, smoke starts to engulf your production facility and you realize you are not going to have a relaxing afternoon. Your business depends on functioning equipment to operate and maintain revenue, so a breakdown could be devastating. You begin to panic. As the smoke triggers the alarms, you realize that being a just-in-time manufacturer means every minute of downtime results in missing a customer’s deadline, a new order, and loss of revenue.

The threat of breakdown is increasingly prevalent in your organization because technologically advanced equipment tends to be sensitive, fragile, and can easily sustain damage from occurrences outside of your control. While this is a hypothetical scenario, today’s organizations rely heavily on the consistency of the utilities servicing their facility. In response, the insurance industry provides insurance policies to address equipment breakdown and utility service interruption that results in damage to critical production components. Equipment Breakdown insurance policies encompass more than utility service interruption. They can include coverage for direct property damage, extra expenses needed to restore operations, loss of revenue, replacement of perishable goods, hazardous substances removal, data restoration, to mention a few. Here are a few examples of critical components:

• Technology equipment provides a host of invaluable features that can include circuitry on high-tech equipment. A breakdown in telecommunication could mean lost time and revenue.

• Electrical systems make up 10 to 15 percent of a building’s worth, so a short circuit in a transformer or panel could quickly destroy a large part of the system.

• Air conditioning and refrigeration systems are critical components for many industries, so damage to these units could temporarily suspend operations.

• Hot water boilers are subject to cracking, collapsing, bulging, and explosion. If your building loses heat in the winter because of a faulty boiler, what is your contingency plan?

Historically, equipment breakdown policies emerged as a response to provide specialty coverage for steam boilers. Standard ISO property policy language excludes equipment breakdown caused by artificially generated electrical current, explosion of steam boilers, mechanical breakdown, and other equipment. However, many of these policies pay for the resulting fire. Many times, this critical insurance policy makes the difference between reopening after a loss or going out of business. Equipment Breakdown policies are similar to the technical equipment and machines used in your facility. If not installed and setup correctly, they will not produce the desired end result. Likewise, Equipment Breakdown policies must be tailored to include the appropriate coverage for each unique policyholder’s exposure.

When reviewing proposals that include such coverage, policyholders often question whether manufacturer’s warranties and well developed preventative maintenance programs are all we need to keep equipment in working order. However, a manufacturer’s warranty and preventative maintenance program typically only address changing fluids, visual inspections, and replacement of worn out parts during a defined time period. Unfortunately, this still leaves a considerably uncontrolled exposure to losses. An Equipment Breakdown policy typically addresses the following:

• direct damage to your business assets and to your customer’s items;

• loss of income because of suspension of operations;

• extra expenses to expedite ordering new equipment; and,

• increased costs to repair due to updates in building ordinances and laws.

Keep in mind, a service contract addresses maintenance and wear and tear issues. Equipment failures can result from things such as supply line surges, excessive moisture, insulation deterioration, single phase operations, overload conditions, lubrication failure, improper repairs, foreign material on windings, poor contacts, poor connections, or dropped material. These items frequently cannot be adequately captured in a budget. 

Looking back at our hypothetical, an equipment breakdown policy would have covered much of the loss. First, the direct damage to the rooftop air-conditioning unit along with the physical damage to the production unit and surrounding property would have been covered. Next, the potential expenses for temporary repairs, renting a nearby facility, and expediting services would have been covered. Last, the policy would cover loss of income and continuing expenses, in addition to employee’s payroll. In order to take advantage of this coverage it is important to keep in mind there are specific enhancements that are needed to be added to the policy, such as coverage of off premise utility services. The purpose of insurance is to transfer the risk to a third party that cannot be financed internally. Take the extra step and design your insurance policy to provide the predictable outcome when unpredictable circumstances occur.

 

Andrew Rowles joined SeibertKeck in 2006 to engage with middle market organizations. Andrew holds several designations in the insurance community and is currently pursuing the Certified Insurance Counselor (CIC) certification. Andrew can be reached at 330.867.3140 or at arowles@seibertkeck.com

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Are Businesses Aware of Social Engineering Schemes?

Kerri L. Keller

Social engineering schemes are on the rise, but do businesses fully understand what that is? Stated plainly, social engineering “refers to the psychological manipulation of people into performing actions or divulging confidential information.”¹ While there are numerous “types” of social engineering schemes, the basic premise is similar to all types of theft and involves lying, cheating, and ultimately stealing. One common scheme today is known as the “business e-mail compromise scheme, or “B.E.C.” scheme.² This scheme is prevalent and can result in “massive financial losses.” In fact, the FBI has even warned about the scheme.³

The way this scheme works is remarkably simple in application and with precaution, it can be preventable. What happens typically with a B.E.C. scheme is that a criminal researches a company to learn about the employees. He or she finds out who manages the money, “as well as the protocol necessary to perform wire transfers in that business environment.”⁴ Once armed with this information, the criminal can defraud a company. This is exactly what happened in Ameriforge Group, Inc. v. Federal Insurance Co., a case that was recently filed in Texas.⁵

In Ameriforge, the plaintiff alleged it was the victim of a social engineering scheme that started when a criminal, posing as the company’s CEO, sent fraudulent emails to a company employee. The email, which requested a wire transfer, was signed by the criminal using the CEO’s name, and it contained a specific order to the employee that the transaction was “very sensitive.” It further directed the employee to communicate only through email and also to not speak to anyone about the transaction.

The employee, believing he was receiving strict and confidential instructions from the CEO to process a wire transfer, never mentioned it to anyone and proceeded with the transfer. A few days later, the criminal—posing as the CEO—tried again, but the employee became suspicious and the second fraud was prevented. In an attempt to recover the initial loss, Ameriforge filed a claim with its insurer, arguing that the loss was covered under the policy’s Forgery and Computer Fraud/Computer Violation coverage provisions.

The insurer denied the claim, in large part, because of the employee’s actions in facilitating the fraud.⁶ And, from a recent survey of cases dealing with these schemes, it is not unusual. While insurance can cover such losses, insurers are quick to deny these types of claims, especially if an employee is involved (even if such involvement is not intentional). In this case, Ameriforge settled before the court could reach the many coverage-related issues; however, the circumstances beg the question of whether it had policies in place that could have prevented the fraud. For instance:

Were “front-end” measures in place? Were employees using proper and updated passwords? Was sensitive and confidential information disposed of through shredding, rather than being placed in the regular trash bins? Were visitors allowed free access to places where sensitive information is handled? Was network security strong enough to detect phishing and fraudulent emails aimed at social engineering? Was information stored in the cloud secure?

Were “back-end” measures in place? Were employees required to verbally confirm with someone the authenticity of a wire transfer request? Did wire transfers require approval from more than one person before being sent? Were employees even aware of social engineering, or what it looks like?

While insurance coverage in this area is changing and new endorsements are becoming available to protect policyholders, the pursuit of coverage for social engineering fraud and similar computer-related crime can present challenges. This area of law is not only newly emerging, it is also presently unsettled. Thus, the best way for businesses to handle this risk is to prevent the loss from happening in the beginning. While all businesses should do their best to ensure proper insurance coverage is in place, the importance of proper preventative measures cannot be overstated.

¹See generally https://en.wikipedia.org/wiki/Social_engineering_(security) (last visited 3/9/17).

²See generally https://www.fbi.gov/contact-us/field-offices/cleveland/news/press-releases/fbi-warns-of-rise-in-schemes-targeting-businesses-and-online-fraud-of-financial-officers-and-individuals (last visited 3/9/17).

³Id.

⁴Id.

⁵Ameriforge Group, Inc. v. Federal Ins. Co., No. 4:16-cv-00377 (S.D. Texas 2016).

⁶Id. at Exhibit C, p. 4.

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Does Your D&O Policy Provide Coverage for Government Investigations?

Gabrielle T. Kelly

Federal and state government agencies are increasingly exercising their authority to conduct extensive investigations and bring enforcement actions. In addition, the question of insurance coverage for fees and costs incurred in connection with governmental inquiries and administrative proceedings has become a frequently litigated issue. Depending on the nature of the investigation and the language of your Directors & Officers (D&O) policy, there may be coverage available.

Defining “Claim”

Courts have been conflicted on whether an investigation constitutes a claim under a D&O policy. While the policy definitions of “claim” may differ somewhat, they all tend to provide coverage for a written monetary demand, or a civil, criminal, or administrative demand for non-pecuniary relief. Some courts have held that a governmental subpoena constitutes a claim that is covered under the policy, because the insured was responding to a “formal or informal investigative order” that is the main investigative tool available to the government for determining whether it has a claim against a company. MBIA Inc. v. Federal Ins. Co., 652 F.3d 152, 159 (2d Cir. 2011).

Conversely, other courts have held that a “claim” does not include a mere request for information or an explanation for some adverse result. Specifically, the Sixth Circuit held that a demand for documents is not a demand for relief, and thus did not amount to a “claim” under the insured’s policies. Employers’ Fire Ins. Co. v. ProMedica Health Systems, Inc., 524 Fed.Appx. 241 (6th Cir.2013).

In ProMedica, the Federal Trade Commission (FTC) notified ProMedica that it was conducting an investigation to determine whether the acquisition of another hospital was a violation of antitrust laws. Once the FTC commenced an administrative action against ProMedica, the company notified its insurer of the claim. The insurer denied coverage on the basis that ProMedica had knowledge of a claim once it received the initial letter from the FTC.

The Sixth Circuit overturned the district court’s ruling that the investigation was a claim. The Court found that the FTC did not “assert to be true” or “declare” that antitrust violations had occurred, and that there was no claim for relief at the time of the initial notice. Id. at 248. Accordingly, there was not a claim until the FTC commenced an action.

Conclusion

The differing outcomes in these cases demonstrate that a policyholder should not assume that a government investigation is covered by their D&O policy. If you are called upon to respond to a governmental inquiry, take the following steps:

• Be familiar with how your insurance policies define “claim;”

• Notify your insurer immediately of costs incurred from investigations by government entities; and

• Contact experienced insurance coverage counsel to discuss the situation to preserve coverage if a claim is later made.

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Cyber Crime: Pathways to Coverage are Illuminating for Certain Losses

P. Wesley Lambert

There can no longer be any question that the United States, and the world in general, has seen a substantial uptick in the number and complexity of cyber crimes being committed against businesses of all sizes and industries. Nor can there be any question that everyone is at risk, from the local corner store to the Fortune 500 company employing the most sophisticated of cyber attack defense systems. The FBI’s Internet Crime Complaint Center (“IC3”) reports that over the last five years, the IC3 has received an average of nearly 300,000 complaints per year.¹

The proliferation of cyber crimes worldwide has led to an increase in the number of insurance coverage lawsuits filed by and against policyholders looking to their insurance carriers to cover some or all of their incurred losses. As a natural consequence of increased litigation, new law has developed providing guideposts to litigants assessing the strengths and weaknesses of their case.

One of the more important issues confronting policyholders is the extent to which their losses must be a “direct” result of a computer-related crime. Two recent decisions from the past year show how policyholders might address this “directness” requirement when challenged to do so.

In State Bank of Bellingham v. BancInsure, Inc., 823 F.3d 456 (8th Cir. 2016), the Eighth Circuit Court of Appeals affirmed a decision in favor of a policyholder, a small local bank. In Bellingham, a bank employee responsible for wiring funds through the Federal Reserve’s FedLine system left for the day after completing a wire transfer but without removing two important security “tokens” from her computer or shutting the computer down. Id. at 457. The next morning, she returned to work to discover that two unauthorized transfers had been executed from Bellingham’s account to two different foreign banks. A subsequent investigation revealed that the subject computer had been infected with a “Zeus Trojan Horse.” This virus, at the opportune time, permitted unauthorized access to the infected computer for the fraudsters to effectuate the unauthorized wire transfers. Id. at 457-58.

Bellingham then looked to BancInsure and the financial institution bond it issued for recovery. After finding that the bond was the equivalent of an insurance policy under Minnesota law, and rejecting several of the insurer’s other arguments, the Eighth Circuit found that the unlawful computer hacking by a third-party was the “efficient proximate cause” of the policyholder’s loss. Id. at 461. The court affirmed the district court’s rejection of the insurer’s argument that the policyholder’s employee’s failure to adhere to security protocols was the overriding cause of the loss. Instead, as the Eight Circuit noted that even if the employee’s negligent actions “played an essential role” in the loss and created a risk of intrusion into the bank’s computer system, “the intrusion and the ensuing loss of bank funds was not ‘certain’ or inevitable.” The ‘overriding cause’ of the loss Bellingham suffered remains the criminal activity of a third party.” Id.

The Northern District of Georgia’s decision in Principle Solutions Group, LLC v. Ironshore Indemnity, Inc., No. 15-cv-4130, 2016 WL 4618761 (N.D. Ga. Aug. 30, 2016) also represents a policyholder victory, entitling the policyholder to coverage for a $1.7 million loss resulting from a social engineering fraud scheme. In Principle Solutions, an employee of the policyholder received a fraudulent email purporting to be from one of the company’s managing directors and directing the employee to discretely wire funds to an account for company acquisition. The employee subsequently received phone calls from an individual posing as the company’s attorney who coaxed the employee into wiring $1.7 million to a fraudulent account. Id. at **1-2.

Principle sought coverage under its commercial crime policy, which covered losses “resulting directly” from fraudulent instructions to a financial institution. Id. at *2. Ironshore argued that the loss did not result “directly” from the fraudulent email because the crime required additional actions by the company employee such as communicating with the financial institution and because the employee voluntarily initiated and completed the wire transfer. Id. at *4.

The district court, finding both parties’ interpretation of the policy’s “resulting directly from” language to be reasonable held that that the provision was ambiguous. As such, the court was compelled to adopt the policyholder’s interpretation, providing coverage even where there were intervening events between the fraud and the ultimate loss. Id. at *5. It is noteworthy, however, that the court relied upon a similar decision in Apache Corp. v. Great American Insurance Co., 2015 WL 7709584 (S.D. Tex. Aug. 7, 2015). The Apache decision was ultimately reversed by the Fifth Circuit Court of Appeals which found an insufficient nexus between the computer-related fraud and the policyholder’s ultimate loss. 662 Fed.Appx. 252 (Oct. 18, 2016).

The recent decisions in Bellingham and Principle Solutions show that policyholders may be entitled to coverage for cyber crime-related losses even where other factors were at play that contributed to the loss. While cyber crime cases are highly fact-intensive and can turn on terms specific to the insured’s policy, the presence of other contributing causes of a cyber crime loss should not automatically deter the policyholder from seeking coverage.

¹https://pdf.ic3.gov/2015_IC3Report.pdf

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Attorney Highlights

Amanda M. Leffler and Caroline L. Marks were recently appointed co-chairs of the Insurance Recovery Practice Group.

Amanda M. Leffler spoke on Additional Insured Coverage at the American Bar Association Section of Litigation, Insurance Coverage Litigation Conference on March 3, 2017.

Amanda M. Leffler and Lucas M. Blower spoke at the Environmental Forum with co-sponsors SeibertKeck Insurance, SandRun Risk and EnviroScience, Inc.

P. Wesley Lambert was appointed as a co-chair of the Employment Committee for the Insurance Coverage Litigation section of the American Bar Association.

Matthew K. Grashoff was selected for the Ohio State Bar Association Leadership Academy, a state-wide program intended to foster leadership skills and provide professional development opportunities to lawyers recently admitted to practice.

Earlier this year, ATHENA Akron honored Bridget A. Franklin and Kerri L. Keller at a reception to honor established women leaders who are new to their positions. Ms. Franklin was recently elected to the position of shareholder at Brouse McDowell, and Ms. Keller was named co-chair of the firm’s Litigation Practice Group.

 

Register Now
at seminars@brouse.com
 

Cyber Crime Breakfast Briefing

How to Protect Your Business from Cyber Risks

Presented by Brouse McDowell & Maconachy Stradley

Thursday, May 11, 2017
 

Breakfast & Registration 8:00 a.m. – 8:30 a.m.

Presentation 8:30 a.m. – 9:30 a.m.

Location:

U.S. Acute Care Solutions (USACS) of Canton

4565 Dressler Rd. NW

Canton, Ohio 44718

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Avoid Employment Claim Pitfalls With Employment Practice Liability Insurance Coverage

By Drew Maconachy

Ohio is an employment-at-will state. This means that the employer, or employee, may terminate the employment agreement for any reason that is not contrary to law or contract. In our current economic environment with relatively high unemployment, this doctrine tends to favor the employer because of the comparatively low standards required to terminate employees. The intent of this article is to detail four of the most common exceptions to the employment-at-will doctrine, and explain how employers can mitigate the risk that these exceptions create.

Common Exceptions to the Employment-At-Will Doctrine

The first two common exceptions to the employment-at-will doctrine involve explicit contracts: collective bargaining agreements and written employment agreements. The existence of either essentially nullifies the employment-at-will doctrine, assuming the relevant agreement covers the manner with which employment may be terminated. Therefore, if an employer discharges an employee in contravention of the terms of such an agreement, it will likely be liable for a breach of contract and exposed to damages such as back pay, compensatory damages, and even punitive damages in certain cases.

2. discrimination based on age,
3. race,
4. sex,
5. origin,
6. color,
7. religion,
8. pregnancy,
9. handicap,
10. ancestry,
11. whistle blowing,
12. serving on a jury,

13. having a criminal record that has been expunged.

The foregoing list is not exhaustive and employees routinely bring multiple-count suits against former employers. While most policyholders understand conceptually that they may be exposed to an employment practices lawsuit, avoiding such suits is not always as simple as it might appear.

The final commonly litigated exception to the employment-at-will doctrine is one arising from an implied contract. Unlike a written agreement that has the terms of employment written and agreed to by both parties, an implied agreement has no such documentation and thus must be inferred by a court based on the circumstances surrounding employment and termination. These circumstances might include employee handbooks, company policy, custom, and oral representations. The Ohio courts have ruled that any one or a combination of several, of these circumstances may create contractual obligations by implication. Since each situation is unique, it is very difficult for employers to completely insulate themselves from loss arising from implied contracts using only risk mitigation tactics.

Mitigation and Transfer of Risks Arising from Employment Claims

The best way for employers to protect themselves against the negative publicity and financial loss that may arise from an employment practices lawsuit is a combination of risk mitigation and risk transfer.

Risk mitigation is the practice of taking proactive, or pre-incident, measures to lower the likelihood of a defined exposure. In this case, that might involve an employment attorney or insurance broker with an employment practices expertise to advise the company on the proper procedures to align it with industry best practices. For instance, such professionals will be able to provide language in your employee handbook to lower the risk of the courts viewing it as an implied contract.

However, risk mitigation doesn’t work in all cases, and certainly doesn’t eliminate the risk of frivolous claims and associated legal defense costs. This creates the need for risk transfer, which is the most thorough way for an employer to insulate themselves from an employment practices claim. In this case, risk transfer would involve the procurement of an employment practices liability insurance policy (also referred to an “EPLI” or E.P.L. policy). “EPLI” coverage protects employers (or fellow employees) when an employee claims that their rights were violated as a result of their employment. An insurer issuing an EPLI policy should respond initially by assigning an employment attorney to the case whose duty is to protect the interests of the employer. The policy will pay for defense costs and potential settlements or judgements that result from the litigation. Additionally, insurance companies are providing more services free of charge to their customers to differentiate themselves in an increasingly competitive market, including counseling policyholders in engaging in risk mitigation tactics like those previously mentioned. Relative to other lines of insurance that business owners purchase, EPLI coverage can be inexpensive, and the price will continue to drop as you work with your insurance company to decrease your mutual exposure to claims that would be covered under their policy.

While employment-at-will tends to be an employer-friendly doctrine, there are several pitfalls that require close attention, and the potential for a frivolous lawsuit is ever-present. Employers can combat employment practices pitfalls by partnering with industry experts, following best practices when creating employee-facing documents, and purchasing an EPLI policy that aligns with their specific needs.

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Security Gaps

Lucas M. Blower

We are at least a decade into our national anxiety over cyber security. The first of the massive data breaches happened in 2005. That is when an AOL employee stole data on 92 million subscribers and sold it to spammers. Also that year, data on 3.9 million Citigroup customers was lost in the mail. In nearly every year since, data breaches have grown in volume and frequency, so that they now feel less like shocking invasions of privacy, and more like one of the many, mundane risks we navigate every day.

Despite the regularity of the risk, there is still no uniform insurance product for data breaches. Many products are named “cyber insurance,” or something similar. But each policy is bespoke and provides a varying range of coverage. And, just because you bought something that sounds like it might give you complete coverage against data breaches, it doesn’t mean that it will.

In 2016, two policyholders learned that lesson the hard way. The first was P.F. Chang’s China Bistro, the victim of a data breach which exposed around 60,000 credit card numbers belonging to its customers. See P.F. Chang’s China Bistro, Inc. v. Fed. Ins. Co., No. CV-15-01322-PHX-SMM, 2016 WL 3055111 (D. Ariz. May 31, 2016). The restaurant immediately notified its insurer, Federal Insurance Company, which had issued a CyberSecurity Policy to P.F. Chang’s corporate parent.

Federal marketed this policy as covering “direct loss, legal liability, and consequential loss resulting from cyber security breaches.” Id. at *1. But, when P.F. Chang’s made a claim, Federal only agreed to pay about half of it. The other half of the claim, which Federal refused to pay, was due to a $1.9 million fee assessed to P.F. Chang’s by the company that processed its credit card payments. The purpose of the fee was to reimburse the credit card companies for costs they incurred in responding to the breach.

The court held that, while the fee might fall within the coverage grant of the policy, it was nonetheless excluded. The policy excluded losses arising from “contractual obligations an insured assumes with a third-party outside of the Policy.” Id. at *7. This exclusion applied to the fee, according to the court, since P.F. Chang’s agreed to pay the fee as part of a contract with a third-party processor. So, even though P.F. Chang’s believed it had coverage against this sort of fee, it was excluded because the fee was the product of a contract. The court recognized, however, that if there were another basis for P.F. Chang’s liability, independent of the contract, then the fee may have been covered by the policy. Id. at *8. (P.F. Chang’s is appealing the court’s decision.)

In another case from 2016, Camp’s Grocery, Inc. v. State Farm Fire & Cas. Co., No. 4:16-cv-0204 (N.D.Ala. Oct. 25, 2016), the policyholder found itself with even less coverage. Hackers stole credit card information from Camp’s Grocery, Inc., which operates a Piggly Wiggly grocery store in Alabama. The credit card companies sued Camp’s, which turned to its insurers for a defense. Camp’s policy included an endorsement that provided coverage for loss to computer programs and electronic data. Camp’s argued that this endorsement provided coverage against data breaches. The court, however, disagreed, holding that the endorsement only provided first-party coverage, not third-party coverage against data breaches.

These two cases underscore the need for policyholders to closely examine the coverage provided by their cyber policies. The confusing array of available products may create a misleading impression for policyholders. So policyholders should read the policy carefully and consider consulting professionals, such as insurance brokers, to review the cyber policies before purchasing them.

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Does a Software Audit Request Constitute a Claim Under a D&O Policy?

Christopher T. Teodosio

Ohio’s Third District Court of Appeals, in Eighth Floor Promotions v. The Cincinnati Insurance Companies, 3d Dist. Mercer No. 10-15-19, 2016-Ohio-7259, recently found that a software audit request – a letter from a software company inquiring about a company’s use or unauthorized duplication of its software – was a “claim” under a D&O policy. Specifically, the Court reasoned that the audit request was a claim because it: (1) sought to determine the extent of copyright violations (rather than if a violation occurred); (2) threatened litigation if the company did not perform a software audit; and (3) asked the company to preserve evidence.

Typical Fact Pattern

This is an increasingly familiar scenario. Your company receives a letter from a software company claiming that your company has engaged in the unauthorized use of software. The software company, wanting to avoid litigation, provides you with the opportunity to resolve the claim outside of the courtroom – if your company takes certain steps. Your company must conduct a comprehensive investigation to identify unpermitted software usage and report the results to the software company. The software company reserves its right to sue you if settlement is unsuccessful and tells you to preserve any evidence related to your software usage. Does this audit request constitute a claim under your D&O insurance policy?

The Eighth Floor Promotions Case

This was the question presented in Eighth Floor Promotions. In that case, Eighth Floor’s D&O policy provided that the insurer would “pay on behalf of the ‘company’ all ‘loss’ which the ‘company’ [was] required to pay as indemnification to the [directors, officers, or employees of the company] resulting from any ‘claim’ for a ‘wrongful act.’” The policy defined a “claim” as a “written demand for monetary damages or non-monetary relief.” Eighth Floor submitted the audit request to its insurance company, but the insurer denied coverage because it did not believe the letter was a “claim” under the policy.

The Third District, however, found that the audit request was a claim because it: (1) “sought to determine the extent of copyright violations” rather than if a violation occurred; (2) implied that the software company would sue Eighth Floor if it did not conduct the company-wide audit; and (3) asked Eighth Floor to preserve evidence.

The lesson from Eighth Floor is clear. A policyholder should notify its D&O insurer when they receive a software audit letter. In addition, a policyholder may use Eighth Floor to argue a demand letter is a “claim” under its D&O policy where the letter asserts the policyholder has already committed violations and forces the policyholder to take certain action under threat of litigation.

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Policyholders Must Be Vigilant About Providing Notice Under Claims-Made Policies

Kerri L. Keller

While it is true that policyholders failing to comply with notice provisions risk compromising their coverage, in many instances, coverage will be forfeited only if the insurer demonstrates that late notice has resulted in prejudice. As such, when policyholders are confronted with denials based on their failure to provide timely notice, they often assert that the insurer must demonstrate prejudice. As policyholders are finding out, however, courts may be hesitant to require prejudice in cases that involve claims-made policies.

For example, in 2011, Ashland Hospital Corporation agreed to pay $40.9 million to resolve allegations by the United States Department of Justice that it billed federal healthcare programs for heart procedures that were not medically necessary.1 Ashland admittedly did not provide timely notice and the insurer denied coverage. Ashland’s primary argument in support of coverage was that its late notice should only preclude coverage if the insurer could demonstrate actual prejudice. In support of its position, Ashland relied upon prior case law which held that the absence of prejudice could serve as an exception to late notice. The insurer disagreed.

On appeal, the court determined that the insurer was not required to establish prejudice because notice was a “condition precedent” to coverage. It noted that a majority of jurisdictions do not require a showing of prejudice for late notice under a claims-made policy, but rather, prejudice was only required under occurrence-based policies. This case was premised on Kentucky law; however, the court’s ruling echoes the position taken by some courts and could foreshadow possible rulings in others.

For instance, the most recent Ohio court to confront this issue examined other cases and noted, as did the court in Ashland, that claims-made policies were different than occurrence-based policies and that late notice under a claims-made policy is not negated by an inability to establish prejudice.2 The court noted that, in some policies, notice provisions are bargained-for requirements that are part of supplemental policy endorsements; whereas, “a general notice requirement in an occurrence-based policy is not an essential part of the bargained-for exchange.”3 Another reason was that claims-made policies provide the insurer with a better ability to calculate risk and premiums because the insurer’s exposure is limited to a specific timeframe; whereas, notice provisions in occurrence-based policies serve to alert the insurer to a claim so that it can begin to investigate a claim.

Importantly, this commentary was from an Ohio trial court and, while the court discussed the application of the notice-prejudice rule to claims-made policies, it never ruled directly on the issue. Thus, its discussion of the notice-prejudice rule as applied to claims-made policies only serves to foreshadow possible future rulings in other cases. Neither the Ohio Supreme Court nor any intermediate Ohio appellate court has ruled on this specific issue, however, and there are arguments that favor application of the notice-prejudice rule even for claims-made policies.

Specifically, the Ohio Supreme Court has not ruled on the specific issue whether the notice-prejudice rule applies to claims-made policies, and the one Ohio Supreme Court case involving the issue of late notice, albeit in the context of assessing a prompt notice provision, required a showing of prejudice by the insurer. The basis for this decision was that late notice without prejudice is not a material breach, and one of the most basic premises of contract law is that breaches must be material in nature.4 In other words, absent prejudice to the insurer, late notice would amount to an inconsequential breach of contract by the insured and, as a matter of law, should not preclude coverage which is an argument that can be applied to all policies.

Furthermore, to the extent an insurer tried to argue that notice under a claims-made policy was provided within the policy period or an extended reporting period but not “as soon as practicable,” it would be likely that a court – even one disfavoring the application of the notice-prejudice rule in claims-made policies – would require a showing of prejudice. Lastly, policyholders still would have arguments to make if the policy language or notice provisions incorporated into claims-made policies were ambiguous or unclear.

Because the law is unsettled, the best advice for policyholders is to always timely provide notice under either a claims-made or an occurrence-based policy in order to avoid any argument by an insurer that there is no coverage due to late notice. In other words, policyholders must be mindful of any specific notice provisions in their policies and be vigilant about providing timely notice when they learn of a claim.

1Ashland Hospital Corporation v. RLI Insurance Company, 2016 U.S. App. LEXIS 4056 (6th Cir. Ky. 2016).
2Quail Energy Corp. v. Greenwich Ins. Co., 2015 Ohio. Misc. LEXIS 13447 (Franklin County 2015).
3Id. (citing Starr Indem. & Liab. Co. v. SGSPetroleum Serv. Corp., 719 F.3d 700 (5th Cir. 2013)).
4See generally Ferrando v. Auto-Owners Mut. Ins. Co., 98 Ohio St.3d 186, 2002-Ohio-7217.

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Attorney Highlights

Christopher J. Carney, Clair E. Dickinson, Meagan L. Moore and Paul A. Rose were named to the Best Lawyers in America 2017.

Lucas M. Blower, Kerri L. Keller, P. Wesley Lambert, Amanda M. Leffler, Caroline L. Marks, Amanda P. Parker and Paul A. Rose spoke at the Brouse McDowell 2016 Annual Insurance Coverage Conference on October 13, 2016 at The Embassy Suites in Independence, Ohio.

Lucas M. Blower was certified as a specialist in Insurance Coverage Law by the Ohio State Bar Association.

Matthew K. Grashoff was interviewed for an upcoming story in Reactions magazine about the potential insurance implications of lawsuits regarding the operation of wastewater injection wells.

Christopher J. Carney, Kerri L. Keller, P. Wesley Lambert, Amanda M. Leffler, Caroline L. Marks and Paul A. Rose were listed as 2017 Super Lawyers® Ohio Super Lawyer through a peer- and achievement-based review conducted by the research team at Super Lawyers®, a service of Thompson Reuters legal division.

Lucas M. Blower, Alexandra V. Dattilo, Gabrielle T. Kelly, Meagan L. Moore and Anastasia J. Wade were named 2017 Ohio Super Lawyers® Rising Stars™ Ohio Super Lawyer through a peer- and achievement-based review conducted by the research team at Super Lawyers®, a service of Thompson Reuters legal division.

Amanda M. Leffler was named in the Top 25: 2017 Cleveland Women Super Lawyers Top List and Top 50: 2017 Women Ohio Super Lawyers Top List.

Amanda M. Leffler was elected to the Leadership Akron Board of Directors, and has also joined the Distribution Committee for the Sisler McFawn Foundation.

Kerri L. Keller and P. Wesley Lambert spoke at the NBI seminar titled “Insurance Coverage Litigation: Secrets Insurance Companies Don’t Want Attorneys to Know” on December 8, 2016.

Kerri L. Keller and P. Wesley Lambert presented a webinar hosted by the Ohio State Bar Association titled “Cyber and Social Engineering Fraud Insurance Coverage: Staying on the Cutting Edge of Coverage Disputes in An Evolving Insurance Landscape.”

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Recent Trends Show that Contractors Should Continue to Pursue Insurance Coverage for Construction Defect Claims

JoZeff W. Gebolys, P. Wesley Lambert

Recently, the highest courts in several states have decided whether construction defect claims will be covered by standard CGL policies, i.e. whether the particular construction defect, and resulting damage, fall within the definition of an “occurrence,” or qualify as “property damage” arising from an “occurrence.” As a result, the law has developed in many states to a point where policyholders can largely predict whether their standard CGL policies will cover construction defect claims. Because the trend strongly favors a finding of coverage, policyholders may be well-served to pursue coverage, even in traditionally unfavorable states.

Basic CGL Policy Definitions and Exclusions

The typical CGL policy obligates insurers to defend and indemnify the insured for claims arising from “bodily injury” or “property damage” caused by an “occurrence.” An occurrence is “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The term “accident” is often undefined, and thus is afforded its ordinary meaning. See e.g., Westfield Ins. Co. v. Custom Agri Sys., 133 Ohio App. 3d 576 (2012).

Courts evaluating whether construction defects are an “occurrence” covered by CGL policies often focus on whether such defects could reasonably be considered an “accident,” or whether they were instead ordinary business risks outside the scope of unintended or unusual risks CGL policies are meant to insure against.

Coverage for Construction Defect Claims Varies by Jurisdiction

What constitutes an “occurrence” in situations involving defective construction work varies from state to state. Cases determining whether defective construction constitutes an “occurrence” generally result in one of three outcomes:

1. Construction defects are covered occurrences.

 Some courts hold that both the defective work itself, and resulting property damage stemming from the defective work, can be a covered “occurrence.” For example, the West Virginia Supreme Court recently reversed prior precedent by holding that defective workmanship “causing bodily injury or property damage is an ‘occurrence’ under a policy of commercial general liability coverage.” See Cherrington v. Erie Ins. Prop. & Cas. Co., 231 W.Va. 470, 483, 745 S.E.2d 508 (2013). See also, K & L Holmes, Inc. v. American Family Mut. Ins. Co., 829 N.W.2d 724, 736 (N.D.2013); Sheehan Constr. Co. v. Cont’l Cas. Co., 935 N.E.2d 160, 171 (Ind.2010).

2. Construction defects are occurrences where third-party damage occurs.

Most courts find that defective construction is an “occurrence” only where there is damage to property other than the defective work itself. Those courts are often split on whether non-defective work of the insured contractor is covered, with some courts finding damage to non-defective work of the insured to be an “occurrence” and others requiring third-party property damage. Compare Taylor Morrison Servs. v. HDI-Gerling Am. Ins. Co., 293 Ga. 456, 460, 746 S.E.2d 587 (2013)(definition of occurrence did not require reference to the “identity of the person whose property or work is damaged thereby...”) and U.S. Fire Ins. Co. v. J.S.U.B., Inc., 979 So.2d 871, 890 (Fla.2007)(coverage found where a subcontractor’s work damaged the insured contractor’s completed, and otherwise non-defective, work) with Rosewood Home Builders, LLC v. Nat’l Fire & Marine Ins. Co., N.D.N.Y. No. 1:11-CV-1421, 2013 U.S. Dist. LEXIS 45374, at *11 (Mar. 29, 2013)(finding no occurrence unless property damage was inflicted upon a third party); Liberty Mut. Fire Ins. Co. v. Kay & Kay Contr., LLC, 545 F.App’x 488, 494 (6th Cir.2013) (applying Kentucky law).

3. No coverage at all.

Some courts have found that no occurrence exists even where there has been resulting third-party property damage, generally relying on the purported rationale that where the insured performs faulty work, it is foreseeable that the faulty work could cause additional property damage. See H.E. Davis & Sons, Inc. v. N. Pac. Ins. Co., 248 F.Supp.2d 1079, 1084 (D. Utah 2002); but see Great Am. Ins. Co. v. Woodside Homes Corp., 448 F.Supp.2d 1275, 1281 (D. Utah 2006) (finding coverage where a subcontractor’s work causes the damage).

In response to decisions limiting coverage for construction defect claims, some states have enacted statutes that require policy definitions to include “faulty workmanship” within the definition of “occurrence,” or require policy language to be interpreted as including certain construction defects within the definition of occurrence. See, e.g., Ark. Code Ann. 23-79-155(a)(2) (2011); Colo. Rev. Stat. 13-20-808(3) (2010). However, these statutes may not be retroactive to the issuance of the policy. See Greystone Constr. v. Nat’l Fire & Marine Ins. Co., 661 F.3d 1272, 1280 (10th Cir.2011).

Recent Decisions Have Trended Towards Coverage

In addition to the West Virginia Supreme Court’s change of course in Cherrington, several decisions in the recent months demonstrate a growing trend towards finding at least some coverage for contractors. In National Surety Corp. v. Westlake Investments, LLC, 880 N.W.2d 724 (Iowa 2016), the Iowa Supreme Court held that defective workmanship of the insured’s subcontractor was covered by a CGL policy, citing a litany of recent cases in support of its holding. In ruling, the Court focused on the language of the “your work” exclusion in the policy, which excepted out work performed by a subcontractor, finding that the language would be superfluous if the policy was not otherwise applicable to defective subcontractor work. Id. at 740-41.

Similarly, in Cypress Point Condo. Assn., Inc. v. Adria Towers, L.L.C., – A.3d -, 2016 N.J. LEXIS 847 (2016), the New Jersey Supreme Court held that defective work of a subcontractor that caused water intrusion was a covered “occurrence” under a CGL policy.

The decisions from these courts, and the recent trend towards coverage in general that guided their decisions, signal that case law on coverage arising from construction defect claims continues to develop and evolve to meet the reasonable expectations of policyholders. In this regard, courts may increasingly be willing to revisit prior decisions that have limited coverage to policyholders for these claims. n

1 While these cases found defective work itself to be an “occurrence,” they subsequently noted that the defective work of the insured was excluded by the business risk exclusions in the applicable policy, most often the “your work” exclusion. As a result, and depending on the facts presented, the practical significance of finding defective work standing alone to be an “occurrence” may be limited. As discussed below, an important distinction is whether a subcontractor has provided the allegedly defective work.

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When Actions Speak Louder Than Words

Sallie Conley Lux

Ohio has long protected the rights of an abandoned policyholder to hold its insurer responsible for the policyholder’s settlement of a covered underlying claim. Sanderson v. Ohio Edison Co., 69 Ohio St.3d 582 (1994). “By abandoning the insureds to their own devices in resolving the suit, the insurer voluntarily forgoes the right to control the litigation and, consequently, will not be heard to complain concerning the resolution of the action in the absence of a showing of fraud, even if liability is conceded by the insureds as a part of settlement negotiations.” Sanderson at 586.

In reaching that now bedrock principle of Ohio law, Sanderson relied on the firmly established tenets discussed decades earlier in Aetna Cas. & Sur. Co. v. Buckeye Union Cas. Co., 157 Ohio St. 385, 392 (1952), which held that “a primary insurer violates its duty to defend at its own peril, and [] its breach of that duty will make it liable for anything the [settling party] had to pay in a good-faith settlement of the claim as a result of the [] insurer’s breach of duty.... [The insurer] cannot be immunized from payment by its own breach of contract.” Id. at 587.

In Sanderson, the insurer breached its obligations when it explicitly refused to defend its insured in the underlying action, even though the allegations in the underlying case clearly “presented a claim which was potentially or arguably within coverage of the policies.” Id. at 586. But what happens when the insurer is not quite so explicit and attempts to mask its denial behind a reservation of rights letter? That is the precise question recently addressed in J.P. Morgan Securities, Inc. v. Vigilant Insurance Company, Sup. Ct. N.Y. No. 600979/09, 2016 WL 3943731 (July 7, 2016).

In J.P. Morgan Securities, the insurer argued that it was not responsible for its policyholder’s ultimate settlement of underlying claims because the insured allegedly violated consent to settle and duty to cooperate provisions in the policies. But during the course of the underlying actions, although the insurer did not explicitly deny coverage, it nevertheless responded repeatedly to the policyholder’s requests for coverage with “reservations of rights” letters that unjustifiably took the positions that there was no “claim” under the policy and that other policy exclusions precluded coverage.

In New York, as in Ohio, while an insured’s failure to comply with its contractual obligations may excuse performance by the insurer, the insurer’s prior unjustified refusal to honor its own contractual obligations may excuse those obligations of the policyholder. “’An insurer declines coverage at its own risk.’” Id. at 2. (Citations omitted). A denial need not be explicit; rather, in circumstances where an insurer “effectively disclaim[s] coverage” through a reservation of rights, the policyholder is excused from complying with conditions precedent - such as consent to settle terms - in a policy. Id. at 4.

The Sanderson rule is motivated by fundamental judicial policy fairness: “Fairness and justice demand that an insurer that breaches its own [contractual] dut[ies] to an insured be estopped from asserting, as a defense ..., that the insured failed to [comply with policy terms]. Neither the insured nor the injured party is required to perform conditions in a policy made vain by reason of the insurer’s prior breach.” Sanderson at 587. Although the facts in Sanderson involved an explicit coverage denial, there is no doubt that Ohio law excuses a policyholder from complying with contractual conditions precedent - such as consent to settle terms - in circumstances where an insurer “effectively disclaim[s]” coverage through reservations of rights or other actions.

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World Harvest Less Than it May Appear?

Amanda P. Parker, Clair E. Dickinson

In May of this year, the Ohio Supreme Court decided World Harvest Church v. Grange Mutual Casualty Co., 2016-Ohio-2913, a coverage case that has gotten a fair amount of attention. Once it is understood just how narrow the decision was, however, it becomes clear that it has gotten more attention than it deserves.

The Underlying Case

In 2006, Michael Faieta picked up his son A.F. from a daycare program run by World Harvest Church. According to Mr. Faieta, A.F. was anxious and upset, and Mr. Faieta discovered numerous fresh cuts, welts, and red marks on A.F.’s back, buttocks, and thighs. A.F. told Mr. Faieta that Richard Vaughan, an employee, had spanked him with a ruler. A.F. was taken to Children’s Hospital, where physicians identified his injuries as being consistent with abuse.

The Faietas sued Vaughan for battery and intentional infliction of emotional distress and World Harvest for negligent supervision and intentional infliction of emotional distress. The trial court ultimately entered judgment in favor of the Faietas for $2,871,431.87. Of that amount, World Harvest was held solely liable for a portion of the compensatory damages, plus all punitive damages and attorney fees. Vaughan was held primarily liable for additional compensatory damages and, based on respondeat superior, World Harvest was secondarily liable for those damages.

World Harvest and Vaughan appealed, and the appellate court affirmed the judgment against them. World Harvest then settled the case, paying the Faietas $3,101,147 including interest.

The Appellate Court’s Decision In The Coverage Case

Following the settlement, World Harvest sought indemnity from its liability insurer, Grange Mutual Casualty Company, and Grange refused to indemnify it. World Harvest then filed an action against Grange for a declaratory judgment. The trial court ultimately determined that World Harvest was entitled to indemnity for the compensatory damages, attorney fees, and interest it paid the Faietas, but not for punitive damages. Both World Harvest and Grange appealed.

The appellate court first analyzed whether World Harvest or Grange had the burden of allocating the compensatory damages awarded in the underlying case among the Faietas’ various claims. Grange argued that the burden was on World Harvest and, since the damages could not be allocated, World Harvest was not entitled to indemnity for any of the damages. World Harvest argued that Grange had the burden of allocating and, since allocation was impossible, if any of the torts was covered, it was entitled to indemnity for all of the damages. Inasmuch as Grange had provided a defense for World Harvest under a reservation of rights and had failed to seek allocation, the court concluded that Grange had the burden of allocating.

Grange next argued that World Harvest was not entitled to coverage for the claim that World Harvest had itself, independently of Vaughan, intentionally inflicted emotional distress. The appellate court rejected that suggestion, and noted that, to the extent the jury found World Harvest liable based on Vaughan’s conduct, those claims constituted covered occurrences because they were accidents from World Harvest’s perspective. Id. at ¶ 30. Relying upon Safeco Ins. Co. of Am. v. White, 122 Ohio St. 3d 562, 2009-Ohio-3718, the appellate court concluded that, because World Harvest’s corporate management did not commit Vaughan’s intentionally harmful conduct, that conduct was an “occurrence” under the policy. Id. at ¶ 37.

The appellate court next considered Grange’s argument that, to the extent World Harvest’s liability was founded on its negligent supervision of Vaughan, coverage under the policy was excluded by a specific exclusion for “abuse or molestation”:

The appellate court rejected the argument that this exclusion only applied to sexual abuse and determined that it “precluded coverage for [World Harvest’s] negligent supervision of Vaughan’s intentionally tortious conduct.” The court also rejected World Harvest’s argument that an endorsement that provided that corporal punishment of a student was not bodily injury “expected or intended from the standpoint of the insured” modified the exclusion.

Therefore, the appellate court held that World Harvest was not entitled to coverage for the damages for which it was held directly liable, but that coverage for the compensatory damages for which it was secondarily liable was not excluded. It also affirmed the trial court’s determination that World Harvest was entitled to coverage for attorney fees and interest.

The Ohio Supreme Court’s Decision

Both World Harvest and Grange filed discretionary appeals to the Ohio Supreme Court. The Court declined jurisdiction over World Harvest’s appeal, but accepted jurisdiction over Grange’s appeal. Importantly, the Court began its analysis by emphasizing the narrow scope of the appeal, stating that “[t]he scope of this appeal is limited to whether the abuse exclusion eliminates coverage for damages awarded for [World Harvest’s] vicarious liability for abuse.” Thus, the Court did not analyze the various other arguments raised by the parties below.

World Harvest argued that, because the exclusion did not mention vicarious liability, it excluded only direct liability. The Court rejected that argument and reversed the determination that World Harvest was entitled to coverage for the compensatory damages awarded against it based on respondeat superior. Thus, the Court considered only the application of a very specific exclusion to a very specific claim in its decision.

It is important, however, to recognize what the Court did not decide. First, it did not decide whether the abuse and molestation exclusion applied to all types of physical abuse or was limited to sexual abuse. Similarly, the Court did not consider the significance of the corporal punishment endorsement. Perhaps most importantly, the Supreme Court did not consider whether the abuse and molestation exclusion actually excluded coverage for World Harvest’s direct liability for its negligent supervision of Vaughan. The precedential value of the World Harvest case, then, is quite limited.

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Attorney Highlights

Wes Lambert was appointed to the Summit County Council for Rebuilding Together NEO.

Wes Lambert was appointed to the Leadership Hudson Class of 2017.

Amanda M. Leffler spoke on August 31, 2016, at the Ohio State Bar Association’s Insurance Seminar, on the issue of Discovery in Coverage Cases.

Amanda M. Leffler was appointed as an editor of the CGL Reporter Editorial Board, part of the Tort, Trial and Insurance Practice Section of the American Bar Association.

Amanda P. Parker was named as a recipient of the “30 for the Future” award by the Greater Akron Chamber.

Paul A. Rose hosted a webinar on July 12, 2016, on “The Evolution of Insurance Conflicts and Coverage Law, 1986-2016.”

Save the date!

National Business Institute Seminar: “Insurance Coverage Litigation: Secrets Insurance Companies Don’t Want Attorneys to Know”
Speakers: Kerri L. Keller & Wes Lambert
December 8, 2016, 8:30 a.m. to 4:30 p.m.
Location: Holiday Inn Independence
6001 Rockside Rd.
Independence, OH 44131

Webinar: “Significant and Recent Ohio Cases Every Property and Casualty Professional Should Know”
Presented by: Amanda M. Leffler
December 13, 2016, 1:30 p.m. to 2:30 p.m.
This complimentary webinar is pending approval for 1 CLE credit hour.
Invitation coming soon via email

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Apples to Apples: Comparing Pollution Legal Liability Policies

With the exception of a few bells and whistles, commercial insurance policies are “all the same, just a commodity,” right? “Once you have read one business owners’ policy, you have read them all,” right? Not so when it comes to environmental liability insurance. The coverage grants, terms, and conditions in environmental liability policies can vary widely, and careful review is required to find the policy that best meets the specific needs of the policyholder and property. Indeed, environmental insurance policies can be constructed uniquely for the situation at hand, whether for a real estate transaction, a brownfield re-development project, or a corporate “M&A” transaction. When looking for environmental insurance, find a broker with demonstrated experience with environmental risk solutions and keep the following points in mind.

Environmental liability insurance has been on the market since at least the early 1980s. Early policies were written specifically to cover contingent RCRA closure obligations, or were intended to fill the gap in coverage created by the qualified pollution exclusion. Today, many insurance companies offer some form of environmental insurance to cover a wide variety of specific risks. For purposes of this article, however, we have analyzed several comparable policy forms offered by Great American Insurance Group, The Chubb Group, and Zurich, for insuring against environmental risk arising out of real estate, or premises, owned by the insured.

Premises environmental liability insurance, also known as pollution legal liability insurance, is almost always written on a claims-made and reported basis, as opposed to an occurrence basis. This generally means that the “pollution condition” must have been discovered during the policy period, or the claim made against the policyholder during the policy period, and the claim must be reported to the insurer during the policy period. Some companies do offer coverage for certain risks on an occurrence basis, however. For example, the Great American policy includes occurrence-based coverage for pollution conditions arising out of contracting services performed by the insured and for pollution conditions arising out of the transportation of products or wastes by a carrier to or from a job site or covered location. These occurrence-based coverage grants offer extended protection to policyholders that can be particularly valuable depending on the nature of the policyholder’s operations.

Premises environmental liability insurance policies typically contain a “menu” of coverage grants which the policyholder selects. At a minimum, these include third-party liability and first-party coverage for newly discovered pollution conditions “on, at, under or emanating from” the policyholder’s scheduled premises. There, the obvious similarities end. Some policies, but not all, include specific coverage for transportation of materials, business interruption, non-owned disposal sites, and crisis management expense.

Premises environmental liability policies generally exclude coverage for environmental conditions “known” to a “responsible insured” prior to the inception date of the policy. Each policy spells out in detail what is meant by “known” and who is included within the terms “responsible insured” or “responsible person.”

Other significant differences in these policies are found in the definitions sections as well. In particular, the definition of “Pollution Condition” is constantly being updated to address topical environmental themes such as illicit abandonment and mold. Great American now includes methamphetamines or associated chemicals within the general definition and adds biological hazards as the direct result of suicide, homicide or other violent crime for Coverage F. And, definitions of “Loss” can significantly alter the scope of coverage, particularly when it comes to covering fines and penalties. “Emergency Response Cost” may mean “first party remediation costs incurred within seven days following the discovery” (Chubb), “costs . . . incurred by the insured on an emergency basis” (Great American), or “costs . . . incurred to avoid an actual imminent and substantial endangerment to the public health or environment” (Zurich). Such subtle differences can be outcome-determinative in an actual claim situation.

Finally, each policy will have its own list of exclusions, and these vary from policy to policy. Exclusions relating to contractual liability, transportation, products, biological hazards and others may significantly restrict coverage for some policyholders depending on the nature of their business.

An experienced broker, working with the policyholder, will give careful consideration to the nature of the risk being insured, the stakeholders’ varying interests, the policy terms and conditions, as well as price and acceptability of the insurer. Having a qualified and experienced team of professionals is necessary to successfully navigate the waters of environmental insurance.

Written by, Rob Snyder – The Fedeli Group, Vice President, Property & Casualty – Environmental Risk Management

Rob Snyder serves as Vice President of Environmental Risk Management with responsibility for new business production in the Property and Casualty Division of The Fedeli Group. Rob designs, implements and executes plans that include technical support of corporate accounts, and furthers the development of environmental risk management clients. Rob provides consultative problem solving in the application of environmental insurance for mergers and acquisitions, real estate development, manufacturing, transportation, contracting, brownfield re-development and any business that poses an environmental financial risk to clients’ balance sheets.

With a Bachelor of Science degree in mechanical engineering, Rob is both a Certified Insurance Counselor and Chartered Property and Casualty Underwriter. He started with The Fedeli Group in 2002. Rob is president of a six-county business network organization and a seventh grade parish religion teacher.

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Passing the Buck: Assignment of Bad Faith Claims in Ohio

JoZeff W. Gebolys

When a policyholder forwards a lawsuit to his or her insurer, the expectation is that the insurer will vigorously defend against the action and work towards a resolution of the case that protects the policyholder’s interests. That is not always how the situation unfolds, of course. Perhaps the insurer believes that no coverage exists for the underlying lawsuit, and refuses to defend the insured. Or perhaps the insurer agrees to defend, but does so subject to a reservation of rights, and with very different ideas about the value of the case or the quality of settlement proposals offered by the plaintiff.

Both of these scenarios place an insured in an uncomfortable position. Some policyholders attempt to avoid the risks associated with ongoing litigation by assigning their rights to recover against the insurer for breach of contract and bad faith to the plaintiff in return for a stipulated or consent judgment approved by the court. Combined with a covenant-not-to-execute against the rest of his or her assets, this provides the policyholder with a swift exit, and provides the plaintiff with an opportunity to collect against the insurer, who likely has a greater ability to pay damages.

But courts across the country, and specifically in Ohio, have not been entirely receptive to these agreements.1 Because Ohio requires a contractual relationship in order for a party to bring a bad faith claim, third parties must acquire an assignment in order to recover against another’s insurer. Siemientkowski v. State Farm Ins. Co., 8th Dist. Cuyahoga No. 85323, 2005-Ohio-4295, ¶ 20. Even so, an assignment’s validity may depend heavily on the insurer’s involvement in the case.

Where an insurer unjustifiably refuses to defend the insured, “the insured[] [is] at liberty to make a reasonable settlement without prejudice to their rights under the contract.” Sanderson v. Ohio Edison Co., 69 Ohio St.3d 582, 586, 1994-Ohio-379, 635 N.E.2d 19. Afterwards, an assignment and consent judgment are likely to be effective against the insurer provided that there is no indication of collusion or fraud on the part of the insured and the plaintiff. Andrade v. Credit Gen. Ins. Co., 5th Dist. Stark Case No. 2000CA00002, 2000 Ohio App. LEXIS 5531, at *19-26 (Nov. 20, 2000). That being said, the plaintiff will still be required to prove bad faith on the part of the insurer.

However, where an insurer is defending the action, but refusing to settle the case within policy limits, Ohio courts look much less favorably on the assignment of an insured’s breach of contract and bad faith claims. In this situation, Ohio law requires an adjudicated judgment against the insured in excess of the policy limits before a third party can recover against the insurer. Romstadt v. Allstate Ins. Co., 59 F.3d 608, 611 (6th Cir.1995)(analyzing Ohio law). This analysis applies despite an insurer’s reservation of rights as to the existence of coverage, and even applies where the insurer has a declaratory action pending elsewhere. Auto-Owners Ins. Co. v. J.C.K.C., Inc., 9th Dist. Summit No. 21847, 2004-Ohio-5186, ¶¶ 18-19. Thus, where the insurer is defending, a policyholder has few options until the case is resolved. These decisions appear motivated by a fear that plaintiffs and the policyholder-defendants will collude to “manufacture” bad faith claims by agreeing to settlement amounts much larger than the actual value of the claim, thereby coercing insurers to settle. Calich v. Allstate Ins. Co., 9th Dist. Summit No. 21500, 2004-Ohio-1619, ¶ 8. Despite these lower court decisions, the Ohio Supreme Court has yet to weigh in on the assignability of bad faith claims, and at least one court has rejected the majority view. Ohio Bar Liab. Ins. Co. v. Hunt, 152 Ohio App.3d 224, 2003-Ohio-1381, 787 N.E.2d 82, ¶ 30 (2d Dist.)(finding no adjudicated excess judgment necessary for a valid assignment). Thus, the state of the law in Ohio may still be subject to change.

Policyholders should carefully craft any covenant-not-to-execute in connection with an assignment so as to preserve coverage rights and avoid falling under policy exclusions relating to assignment. Of course, many considerations will go into determining how best to handle an uncooperative insurer. As each situation and jurisdiction is different, coverage counsel can be an invaluable tool in deciding whether an assignment is right for you.

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Managing Cybersecurity Risk in the Construction Industry

Charles D. Price

Major data breaches are in the news almost every week. Although only the high-profile, mega-breaches make the headlines (e.g., Target, Sony, and Home Depot), cybersecurity breaches affect businesses of all sizes. Of the estimated 120,000 or so cybersecurity attacks per day, about 25% are aimed at companies with less than 100 employees. Moreover, cybersecurity breaches affect all industry sectors, construction included. Indeed, 2015 saw several reported cases of data breaches in the construction industry. Among the victims were two of the largest construction management companies in the United States. So the risk is real and must be managed effectively.

The Cybersecurity Risks to Contractors

Like any other business, contractors must take reasonable precautions to protect against traditional cybersecurity risks—i.e., the risk of data breaches, system failures, and cyber-attacks that can compromise sensitive company and employee information. But there are industry-specific factors that expose contractors to some additional risks.

For instance, contractors often use computers and tablets to handle sensitive project information, such as images, blueprints, or architectural and engineering drawings. This information is often stored in huge electronic files where viruses and malware can hide. If not caught early, these malicious programs can compromise or destroy critical information, impacting project deadlines and creating significant financial liability.

Moreover, construction sites often provide a golden opportunity for thieves and hackers. Employee laptops, mobile devices, and tablets— which are a treasure-trove of sensitive data—are frequently used at construction sites. And they are often targets of theft. Moreover, because these mobile devices are connected to an unsecured Wi-Fi network at a jobsite, hackers can potentially connect to your company’s network without you even knowing.

Even if they are not interested in your data, hackers may exploit weaknesses in your system to obtain sensitive third-party information—such as customer or subcontractor data and financial records—or gain access to other IT networks. This is what happened in the Target case. Hackers gained access to the retail giant’s billing system via an employee of an HVAC subcontractor. Once inside Target’s network, the hackers accessed sensitive financial data for 110 million Target customers. The breach has reportedly cost Target over $250 million.

Managing Cybersecurity Risk

In short, the impact of a cybersecurity breach on your business—or on your project owner’s business—can be catastrophic. Accordingly, you should have a risk-management plan in place to avoid the potentially devastating impact of a data breach. While such a plan must be tailored to your unique cyber risks, here are some security measures you should consider:

• Retain a cybersecurity expert to identify system vulnerabilities before a breach occurs;
• Establish security processes and protocols to detect breaches early;
• Install security software on your company’s servers that can detect and block cyber threats before they infect your system and compromise your data;
• Ensure firewalls are enabled and updated regularly with security patches;
• Equip systems and mobile devices with software to encrypt data in your office and in transit;
• Secure your company’s Wi-Fi network, both at the office and at the jobsite;
• Create a clearly-defined response protocol should a breach occur;
• Train employees on security policies and practices and enforce your policies.

This last point warrants further discussion. Whether it’s human error or malicious acts, studies show that the majority of data breaches originate inside company walls. One recent industry study suggests that 79% of employees engage in behavior (intentional or unintentional) that places their employer’s data at risk. Another study concluded that employee conduct caused 59% of cybersecurity incidents last year.

Insuring Against Cybersecurity Risk

Understand how you can protect your company through insurance, including cyber insurance. Most contractors purchase traditional insurance lines, including Commercial General Liability (CGL) insurance, which may not respond to damages to intangible property and often exclude data and technology losses. Further, other common types of insurance, such as crime policies, directors and officers insurance, professional liability, and first-party property insurance provide little, if any, meaningful protection against cybersecurity risks.

Cyber insurance, however, may cover damage caused by hackers or rogue employees who shut down your (or your project owner’s) website, computer system, or the systems of an essential service provider. Typically, a cyber policy will cover breach notification, crisis response services, data recovery expenses, business interruption, and cyber-extortion. Coverage for additional cyber-related risks—including security and privacy liability, technology errors and omission, and dependent business operation—may be available by endorsement or through a separate product. Talk to your lawyer or insurance broker about what policies and coverages are right for you.

Conclusion

The construction industry is not immune to cybersecurity breaches. On the contrary, factors unique to the industry make it more susceptible to these risks. Given the prevalence of security attacks, contractors must anticipate being the victim of a cybersecurity attack or breach in the future. It is, therefore, critical to consider and evaluate your cybersecurity risks, particularly in determining risk management plans and the types and amounts of insurance you’ll need to best protect yourself.

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Attorney Highlights

Gabrielle T. Kelly spoke on Insurance Coverage for Construction Projects at the NBI seminar on May 16, 2016.

Amanda M. Leffler was inducted as a Fellow of the 2016 Class of the Ohio State Bar Foundation.

Amanda M. Leffler was appointed to a three-year term on the Board of Governors of the Ohio State Bar Association.

Keven Drummond Eiber spoke on maximizing CGL coverage was a speaker at the CMBA Advanced Insurance Law Seminar on June 7, 2016.

Gabrielle T. Kelly and her husband, Anthony Anderson, welcomed their new baby boy, Brayden Tate Anderson, on March 29, 2016.

Bridget A. Franklin and her husband, Amir Darr, welcomed their new baby boy, Sufyan “Sufi” Darr, on May 8, 2016.

Keven Drummond Eiber, sailing with her husband Jeff and son Emery, took first place in the 2016 BVI Spring Regatta in Tortola, B.V.I., and first place in the inaugural Caribbean Cup Series, a combined two-regatta event, competing in the VX One class.

Save the date!

Webinar: “Broker Liabilities and Best Practices”
Presented by: Caroline L. Marks and Matthew K. Grashoff
July 28, 2016, 1:00 p.m. to 1:30 p.m.
Invitation coming soon via email

Fourth Annual Insurance Coverage Conference
October 13, 2016, 1:30 p.m. to 5:30 p.m.
Location: Embassy Suites Independence
5800 Rockside Woods Blvd. Independence, OH 44131

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The Widening Arc of Coverage

Paul A. Rose

It is a common misconception that “intentional tort” liabilities are not insurable. To the contrary, such liabilities often are insurable; in fact, in certain cases, even punitive damages for such liabilities are insurable. Moreover, certain coverages are expressly written to insure such liabilities. For instance, advertising liability and personal injury liability coverages in Commercial General Liability Policies often expressly cover liabilities arising from such intentional torts as defamation, invasion of privacy, malicious prosecution, and false imprisonment. Employment Practices Liability Policies typically cover liabilities for a wide range of employment-related intentional torts, such as harassment or discrimination. Other types of policies, such as Directors and Officers Liability Policies, typically cover “wrongful acts,” which usually are defined broadly to encompass a wide range of intentional tort liabilities.

It is true, though, that certain liability coverages apply only to unintentional injuries or damage—in the words of the typical Commercial General Liability Policy, to injury or damage that is “neither expected nor intended from the standpoint of the insured.” In regard to these more fortuity-based coverages, it is notable that the law of Ohio steadily and consistently has evolved to broaden the range of claims that would fall within their scope. This article will summarize three cases from the Ohio Supreme Court, including a very recent one, that have been notable developments in this evolution.

The Ohio Supreme Court first clearly delineated the types of claims that were sufficiently fortuitous to be considered covered “occurrences” under general liability policies in Physicians Ins. Co. v. Swanson, 58 Ohio St.3d 189 (1991). In that case, parents of teenagers asserted coverage under two policies for liabilities arising from the unfortunate consequences of the use of a BB gun. Two groups of teenagers had gathered near a lake, and a teen in one group fired a BB gun toward the teens in the other group. He testified that he had intended to hit a sign near the second group of teens, to frighten them. One of the shots, however, struck a teen from the second group in the eye, resulting in the loss of the eye. The insurers both denied the claim, contending that because the firing of the BB gun had been intentional, the claim was not covered.

The Ohio Supreme Court determined that the claim could be covered, and in so doing established a number of principles that have provided valuable protections for policyholders. First, the Court noted that the policy language which limited coverage to only unexpected or unintended injuries appeared in different sections of the two policies. In one policy, the limitation appeared in an exclusion, and in the other it appeared in the definition of a term used in the coverage grant. The Court determined that the location of the limitation in the policies was irrelevant for purposes of the coverage analysis, stating that because “the effect of both policies is the same, we will treat the respective policy provisions in like manner.” Id. at 191. Because the language had the effect of limiting coverage, the Court treated it as an exclusion, as to which the insurers would have the burden of proof, regardless of where it appeared in the policy.

Second, the Court addressed the insurers’ argument that there should be no coverage because the liabilities arose from an intentional act. The Court rejected that argument, noting that the policies purported to exclude coverage for injuries that were expected or intended, not for any injuries that merely arose from acts that were expected or intended. The Court summarized its holding as follows: “In order to avoid coverage on the basis of an exclusion for expected or intended injuries, the insurer must demonstrate that the injury itself was expected or intended.” Id. at syllabus. The Court noted, “[M]any injuries result from intentional acts, although the injuries themselves are wholly unintentional.” Id. at 193.

Finally, it is notable that the Court in Swanson held that the claim could be covered even though some negative consequence had been intended. After insults were exchanged between the two groups of teenagers, and tensions rose, a teen from one group shot at the other group with the admitted intention of causing fear. Because the adverse result—the loss of an eye—was different from the one intended, however, the Court determined that the claim could be covered.

These doctrines served policyholders well for nearly 20 years, and then the Ohio Supreme Court considered a somewhat similar situation in Allstate Ins. Co. v. Campbell, 128 Ohio St.3d 186 (2010), a case in which it further expanded policyholder rights. In Campbell, the Court addressed another claim that arose from misconduct by teenagers. A group of teenage boys placed a Styrofoam target deer on a snowy roadway at night to surprise unsuspecting drivers. One such driver took evasive action, lost control of his vehicle, and sustained severe injuries.

The insurers argued that the actions of the boys were substantially certain to cause injury, such that the boys’ expectation or intention to do so should have been presumed, thereby satisfying the insurers’ burden under Swanson to establish their defense. The Court rejected this argument, holding that under various policy provisions that focused on the expectation or intention of causing injury, as opposed to the expectation or intention of performing acts that cause injury, the insurers could escape liability only if “the insured’s intentional act and the harm caused are intrinsically tied so that the act necessarily resulted in the harm.” Id. at 195 (emphasis added). The Court also made clear that the burden of insurers under this “inferred intent doctrine” was a high one. It noted that an insurer’s burden could be satisfied in regard to underlying claims such as murder or sexual molestation, or in regard to any other of “a narrow range of cases” in which “the action necessitates the harm,” but the Court emphasized that “courts should be careful to avoid applying the doctrine in cases where the insured’s intentional act will not necessarily result in the harm caused by that act.” Id.

Five years after Campbell, in which the Ohio Supreme Court established this heightened burden on insurers asserting an “expected or intended” injury defense, the Court further established and delineated the burden in Grange v. Auto Owners Ins., 144 Ohio St.3d 57 (2015). In that case, a landlord policyholder faced a claim of housing discrimination that allegedly resulted in emotional distress. The landlord’s insurer denied the corresponding coverage claim, contending that the policy at issue did not expressly cover discrimination claims and that the policyholder, in any event, intended to discriminate.

The Ohio Supreme Court found that the claim could be covered under the umbrella policy at issue. In regard to whether the claim fell within the coverage grant, the Court noted that the policy expressly covered “humiliation,” which could encompass emotional distress damages. In regard to the insurer’s “expected or intended” defense, the Court held that the “inferred intent” doctrine it articulated in Campbell did not extend to bar coverage for the claim. The Court quoted with approval the language of the underlying appellate court, noting that regardless of whether the landlord intended to discriminate, “the appropriate question to ask is whether [the landlord] expected or intended [the tenant] to be humiliated by his conduct.” The Court held, “We do not find that humiliation is so intrinsically tied to … discrimination that [the landlord’s] act necessarily resulted in the harm suffered ….” Id. at 65. It added, “We cannot say that the personal injury was intended in this case, nor can we say that emotional distress is inherent in the very nature of housing discrimination.” Id. at 66.

This line of cases permits a number of conclusions. One is that liability policies cover a wide range of ostensibly “intentional” tort liabilities, so policyholders always should be thorough in evaluating their coverage prospects, regardless of the nature of their alleged underlying liabilities. Another is that “intentional” or “expected or intended” coverage defenses are difficult for insurers to establish. As the law in this area continues to evolve, the degree of difficulty for insurers continues to increase, for the ongoing benefit of individuals and businesses in Ohio.

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Don’t Let Insolvency Scare You: Navigating the London Claims Process for OIC and L&O

Bridget A. Franklin

If your company historically obtained insurance coverage from the London Market, it may have recently received a notice relating to claims it might have against two insolvent London Market companies – OIC Run-Off Limited (“OIC”) and The London and Overseas Insurance Company Limited (“L&O”). While the notice looks simple enough, establishing a bar date of September 12, 2016, to file claims, it also directs parties to review the “Amending Scheme” to determine their rights to file claims. Unfortunately, the Amending Scheme, with exhibits, is over 200 pages and may be difficult to navigate.

OIC (previously known as Orion Insurance Company Limited) and L&O stopped underwriting policies in 1992 and subsequently became insolvent. The insurers’ liquidation plan, known as the Original Scheme, was approved and effective in March of 1997. The Original Scheme allowed policyholders to assert claims against OIC or L&O in the ordinary course of their business. Recently, however, a court allowed OIC and L&O to amend the scheme to, among other things, require policyholders to file claims, including estimated claims, by September 12, 2016, or be forever barred from asserting such claims.

Policyholders with environmental, asbestos, toxic tort and other long term claims will need to engage in a detailed analysis of their London Market insurance policies to determine whether OIC or L&O subscribed to any of them. This is a significant undertaking, but it may well prove productive in this instance. The scheme administrators currently estimate that policyholder claimants could receive a distribution of up to 78% of their claims. Of course, filing a claim does not guarantee a distribution as the scheme administrators must agree with the validity and amount of the claim. Where disputed, policyholders will need to navigate a disputed claims process under the Amending Scheme. Further complicating issues, some OIC and L&O policies may have been signed and issued by the Institute of London Underwriters (“ILU Policies”). Policyholders with claims related to ILU Policies may have further opportunities to recover additional distributions or payments on their claims.

Notwithstanding the foregoing complexities, policyholders with significant actual or potential losses should carefully consider filing a claim. Although policyholders may ultimately engage insurance recovery counsel to help with the process, policyholders can begin the process by contacting the OIC Help Desk (http://www.oicrun-offltd.com/Public/ContactUs.aspx) to obtain a claim form. Some policyholders may have already received an individual login ID and password to access claim forms electronically. If the scheme administrators are aware of the policyholder’s potential claim, the policyholder should receive a prepopulated claim form, which should include certain policy and claim information.

Many policyholders have a tendency to ignore and forego claims against insolvent London insurers, finding the process too burdensome. Navigating the process may be a headache, but it could ultimately result in a substantial recovery, at far less cost than what is typically incurred in coverage litigation in U.S. courts.

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Does Your Policy Do Double Duty When Your Employees Do: Shifting the Risk of Moonlighting Officers

Amanda P. Parker

Hardworking employees are an asset to any employer, but when can that same employee be a liability? For municipalities, the risk is all too common. Municipalities may be held liable for the actions of an off-duty officer, and without adequate protection, these officers can substantially increase a municipality’s risk of liability. Today, like many other employees, law enforcement officers find themselves in need of secondary employment, a practice known as moonlighting in the law enforcement community. Significantly, law enforcement is an occupation that has one of the highest rates of secondary employment, as officers are commonly hired by private employers to act as security guards, bouncers, process servers, bail bondsmen, debt collectors, or repossession agents.

While this off-duty employment increases police presence in the community, it can raise several concerns. Moonlighting is a high risk cause of law enforcement liability because when taking action during his secondary employment, the officer has more latitude, less oversight and no access to a partner, back-up officers, or other law enforcement assets. Moreover, off-duty security also causes citizen confusion because the extent of the officer’s authority may be unclear. Consequently, moonlighting increases the likelihood that an officer may be accused of engaging in misconduct. Under U.S.C. §1983 when an officer, under color of state law, causes the deprivation of any rights, privileges, or immunities secured by the Constitution, the municipality may be held liable. Therefore, when an officer takes action while moonlighting, he increases the chance that he and the municipality will be liable to the citizen.

In order to manage the increased risk of liability from claims resulting from moonlighting, a municipality may choose to use any of the following strategies: (1) require each officer to acquire individual moonlighting coverage; (2) require an indemnity agreement with the secondary employer; (3) require the secondary employer to obtain coverage listing the municipality as an additional insured; and/or (4) acquire moonlighting coverage for the municipality. In addition, the best way to limit the municipality’s exposure to liability from moonlighting is to have a clear policy regulating officer’s off-duty employment.

What is Moonlighting Coverage?
While the nation’s largest cities self-insure for most municipal liability risks, many municipalities find it necessary to obtain law enforcement liability coverage. Law enforcement liability policies provide indemnity and defense cost coverage for losses or damages arising from wrongful acts committed during the course of law enforcement activities. These policies, however, often include limiting language and generally do not cover moonlighting officers. However, insurance companies offer such moonlighting coverage through an endorsement or as a separate policy.

What to look for in Moonlighting Coverage?
When evaluating moonlighting coverage, first consider the policy definition of “insured.” Specifically, the definition should be broad enough to include officers acting outside the scope of their employment for the municipality. Additionally, consider who is listed as the named insured. Does it include the individual officer and the municipality or government agency? Municipalities may also consider having the coverage extended to the private secondary employer.

Next consider whether the coverage extends only to “approved moonlighting activities.” Many insurers strongly encourage or require the municipality to regulate the secondary employment of its officers. Regulating officer’s off-duty employment usually involves establishing a policy that minimizes the factors contributing to municipal liability and establishing “approved moonlighting activities.” As a result, it is not uncommon for such moonlighting policies to prohibit officers from working in establishments serving liquor. Some moonlighting policies also provide guidelines on whether the officer may or may not moonlight in his uniform or carry his department issued weapon.

Given the complexities, and fact-intensive analysis of municipal liability for off-duty conduct, it is critical to have both a clear moonlighting policy and to have comprehensive insurance coverage. As always, you should consider contacting a qualified insurance broker or coverage counsel to help determine which coverage strategy is best for you, your department or your municipality.

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Attorney Highlights

Christopher J. Carney, Keven Drummond Eiber, Kerri L. Keller, Amanda M. Leffler, Caroline L. Marks and Paul A. Rose were listed as 2016 Super Lawyers® Ohio Super Lawyer through a peer- and achievement-based review conducted by the research team at Super Lawyers, a service of Thomson Reuters legal division.

Lucas M. Blower, Alexandra V. Dattilo, Gabrielle T. Kelly, P. Wesley Lambert and Anastasia J. Wade were listed as 2016 Ohio Super Lawyers® Rising Stars™ Ohio Super Lawyer through a peer- and achievement-based review conducted by the research team at Super Lawyers, a service of Thomson Reuters legal division.

Keven Drummond Eiber and Amanda M. Leffler were named in the Top 25: 2016 Women Cleveland Super Lawyers Top List and Top 50: 2016 Women Ohio Super Lawyers Top List.

Amanda M. Leffler received the Distinguished Alumnus Award from Torchbearers.

Bridget A. Franklin and Gabrielle T. Kelly were elected as Partners of the firm.

Amanda M. Leffler was elected Vice-Chair of the Board of United Disability Services.

Kerri L. Keller is now President of the Victim Assistance Program.

Bridget A. Franklin and Paul A. Rose were published in the Insurance Coverage Law Bulletin’s March issue entitled, “Is Coverage Hiding in Your Insured Contracts?”

P. Wesley Lambert and his wife, Sarah, welcomed their new baby boy, Henry Mason.

David Sporar and his wife, Colleen Hill Sporar, welcomed their new baby girl, Morgan Millicent.

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When Ads Attack: Recent Cases Defining Advertising Injury

Alexandra V. Dattilo, Anastasia J. Wade

Commercial general liability (“CGL”) insurance policies provide companies with coverage for a variety of damages and liabilities including property damage, personal injury, and advertising injury. The coverage terms for advertising injury are usually found under Coverage B: Personal and Advertising Injury Liability. Advertising injury usually means “injury” caused by (1) oral or written publication that defames another or disparages another’s goods, products, or services, (2) oral or written publication that violates another’s right to privacy, (3) using another’s advertising idea, or (4) infringement of copyright, trade dress or slogan in an advertisement. The determination of coverage for an advertising injury depends on whether the cause of the injury is actually an advertisement. While this may appear to be a straightforward issue, courts have devoted significant time and analysis determining the scope of the word “advertisement” in a CGL policy and its causal connection to the injury suffered. This article provides a review of recent cases determining whether the allegations asserted in the underlying complaint involve an advertisement and whether that advertisement caused an injury that entitled the policyholder to defense coverage.

The typical CGL policy defines “advertisement” as “a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters.” Although television and radio commercials, magazine advertisements and billboards are clearly included as an “advertisement” under this definition, the analysis is harder when considering whether this would apply to features such as product packaging or store displays.

In the case of E.S.Y., Inc. v. Scottsdale Ins. Co., No. 15-21349, 2015 U.S. Dist. LEXIS 143848 (S.D. Fla. 2015), the court was faced with the issue of whether hang tags attached to the policyholder’s garments were “advertisements” as defined by the plaintiff’s CGL policy. The policyholder argued that the hang tags on the garments were a printed advertisement, whereas the insurer contended that the hang tags were part of the garments themselves. Although the hang tags only provided minimal information, mainly the brand name of the policyholder, they were designed to attract customers. Moreover, the hang tags were attached to the outside of the garments. The court contrasted the policyholder’s hang tags with less fanciful hangtags are no more than a price tag sticker attached inside of the garment and, as a result, hidden from the view of a customer. Comparing the two types of hang tags, the court held that the policyholder’s hang tags were attached to the garment with the purpose of attracting the customers’ attention and were sufficiently exposed to the public to fit under the broad definition of “advertising” under the policy.

Likewise, in Selective Ins. Co. of Southeast v. Creation Supply, Inc., 2015 IL App (1st) 140152-U (2015), the policyholder was asserting insurance coverage for its defense of a trade dress claim involving markers with a square body and end-cap. The complaint alleged that the policyholder advertised the markers in retail store displays. In reviewing the retail store display to determine whether it constituted an advertisement, the court held that the placards placed above the bin of markers displayed the shape and design of the markers to attract customers, and thus, was an advertisement as defined by the insurance policy. However, the court noted that if the display was merely a large bin of the markers and nothing more, it may not constitute advertising.

While the underlying matter must include allegations involving an advertisement, CGL policies also require a causal connection between the injury alleged and the advertising activity at issue. The misconduct alleged must occur in the advertisement itself and the damages alleged must result from the advertisement.

For example, in the case of Erie Ins. Exch. v. Compeve Corp., 32 N.E.3d 160 (Ill. 1st Dis. 2015), the policyholder sold computers installed with counterfeit Microsoft software. Microsoft sued the policyholder for copyright infringement, among other claims, and the policyholder tendered the defense of the matter to its insurer. The insurer denied the claim, concluding that Microsoft’s complaint did not allege an “advertising injury.” Although Microsoft alleged that the policyholder advertised its counterfeit software that infringed Microsoft’s copyright, Microsoft did not allege that any copyrighted information was included in the policyholder’s advertisements. The court held that the advertisement of the infringing product is not the same as an advertisement that infringes a copyright. Therefore, the court held that there was no causal connection between the advertisement of the infringing software and the injury suffered by Microsoft.

Further, in Md. Cas. Co. v. Blackstone Int’l Ltd., 442 Md. 685 (2015), the policyholder used an advertising idea created by its partner in a joint venture without the partner’s knowledge and without paying the partner a portion of the profits. The policyholder asserted coverage from its insurer for the resulting suit. The court held that, while the claim involved an advertisement, the injury alleged did not result from the use of the partner’s advertising idea, but from the failure to pay for the use. Therefore, the claim arose from a breach of contract and not from the advertisement and was not covered by the policy.

Thus, these courts have concluded that an advertisement will be covered under a CGL insurance policy where the activity alleged does more than provide simple information about the product. Advertisements attract customers to the product or service, which includes making the product more conspicuous to customers just wandering about the store. Moreover, there must be some causal connection between the injury and the advertisement apart from injury caused by the advertised product or service or injury caused by a breach of contract for the advertisement.

Advertising injury usually means “injury” caused by:

1. Oral or written publication that defames another or disparages another’s goods, products, or services

2. Oral or written publication that violates another’s right to privacy

3. Using another’s advertising idea

4. Infringement of copyright, trade dress or slogan in an advertisement

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They Say “the Best Offense is a Good Defense”

David Sporar

Most types of liability insurance policies impose upon the insurer two distinct obligations: the duty to indemnify the policyholder for claims covered by the policy and the duty to pay the defense costs of a policyholder in litigation in which covered claims are potentially or arguably asserted against the policyholder. The latter obligation—called the defense obligation or “duty to defend”— requires the insurer not only to provide a legal defense for the policyholder in the litigation, but also requires the insurer to pay the policyholder for the costs the policyholder incurs to the extent the policyholder retains its own legal counsel for its defense. It is important for a policyholder to understand its contractual right to a defense under its insurance policy. It provides valuable economic protection even when no separate indemnification obligation is ultimately triggered under the policy. The following are some brief pointers for taking advantage of your contractual right to a defense.

When Is the Defense Obligation Triggered?

An insurer’s defense obligation is triggered when the complaint filed against the policyholder states a claim that is potentially or arguably within policy coverage. This is a very low threshold. A single allegation can render a claim potentially or arguably within policy coverage—even if the allegation is groundless, false, or fraudulent. If there is any doubt about whether a claim is within the policy’s indemnity coverage, then the insurer must provide a defense. A policyholder that finds itself the subject of a lawsuit should look very closely at the complaint filed against it to determine whether that complaint triggers its insurer’s duty to defend. In many instances, the insurer’s defense obligation will be triggered.

For What Claims Must an Insurer Provide a Defense?

Where a plaintiff asserts multiple claims against the policyholder in a single action, some of which are potentially or arguably within the indemnity coverage of the policy and some of which are not, the insurer generally must provide a defense against all of the claims.

What About Claims Asserted by a Policyholder?

Sometimes a defendant to litigation is able to assert claims against the plaintiff or a third-party; and sometimes a defendant is required to assert such claims. When a policyholder asserts affirmative claims, does its insurer’s defense obligation extend to such claims? The answer is maybe. Some courts have held that an insurer’s defense obligation extends to such affirmative claims when those claims are sufficiently “defensive” in nature. Examples include claims for contribution or indemnification, where the defendant seeks payment from a third-party to offset and, therefore, diminish its own liability. Whether an insurer’s defense obligation extends to such claims will depend on the law applicable to the litigation and the language of the insurance policy.

Can an Insurer Withdraw Its Defense?

Sometimes, through the course of litigation, claims can be dismissed such that they are no longer at issue in the litigation. If the litigation against a policyholder involves multiple claims—some of which trigger the insurer’s defense obligation and some of which do not—and the claims that trigger the insurer’s defense obligation are dismissed, the insurer’s defense obligation will end. Practically speaking, this means that, as of the date of the dismissal of all potentially or arguably covered claims, the insurer generally will not be required to pay for the policyholder’s defense.

Can an Insurer Seek Reimbursement for the Cost of Defending the Policyholder?

Nationally, courts are split on the issue of whether an insurer can recover the cost of its defense from the policyholder if the claim is ultimately determined not to fall within the indemnity coverage of the policy. Some courts have held that the insurer may not recover the cost of defending its policyholder unless the language of the insurance policy expressly permits it. Other courts have held that the insurer may recover the cost of defending its policyholder only for claims that were not arguably or potentially within policy coverage. Importantly, one federal court has held that, even absent a policy provision requiring reimbursement, a policyholder must repay its insurer for defense costs where the policyholder fails to object to the insurer’s reservation of its purported right to recoup such costs. United Nat’l Ins. Co. v. SST Fitness Corp., 309 F.3d 914 (6th Cir. 2002). In SST, the Sixth Circuit found that the policyholder’s failure to object created a contract implied in fact whereby the policyholder agreed to repay defense costs if the claim was ultimately determined to not fall within the indemnity coverage of the policy. The moral of the story is this: a policyholder should always respond to its insurer’s reservation of rights letter as soon as possible and object to any of the insurer’s terms or conditions set forth therein that the policyholder finds objectionable, including any assertions of “rights” by the insurer to recover back defense costs.

The right to a defense (or defense costs) is significant and can operate as leverage in a dispute with an insurer. Policyholders should endeavor to timely respond to insurer communications and point to well-established principles of insurance law in order to obtain the full benefit of that leverage over their insurers.

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Does Settling without an Insurer's Consent Result in Forfeiture of Coverage in Reservation of Rights Cases?

Caroline L. Marks

Insurance policies often contain consent-to-settle or similar cooperation provisions that require a policyholder to obtain an insurer’s consent before entering into a settlement. When the policyholder wishes to settle an underlying tort case and the insurer - which is defending but has reserved its right to disclaim coverage - refuses to consent to the proposed settlement, can the policyholder settle without forfeiting its indemnity coverage? As with many insurance-law issues, the answer depends on which state’s law applies. Courts in some states have held that, in a reservation of rights case, a policyholder forfeits its indemnity coverage by settling without the insurer’s consent, absent a showing of bad faith.

The Pennsylvania Supreme Court, however, recently took a different approach. It held that when an insurer defends subject to a reservation of rights to disclaim coverage and refuses to consent to a settlement, the policyholder may accept the settlement over the insurer’s refusal. The settlement, however, must be fair, reasonable, and non-collusive, and the policy ultimately must be found to cover the relevant claims. Babcock & Wilcox Co. v. Am. Nuclear Insurers, Pennsylvania Supreme Court No. 2 WAP 2014 (July 21, 2015). Under such circumstances, the insurer must indemnify the policyholder for the settlement amount, subject to the policy limits.

This rule makes imminent sense because it allows the policyholder to protect itself from the potential of a larger judgment for which it ultimately may be responsible if the insurer prevails on its coverage defenses. It also fosters the widely-accepted public policy favoring settlement. Correspondingly, the rule preserves the insurer’s right to challenge the fairness and reasonableness of any settlement. Thus, the rule adopted by the Pennsylvania Supreme Court protects the rights of both policyholders and insurers.

Pennsylvania is not alone in adopting this rule, having joined Arizona and other states. Not all jurisdictions, however, have espoused this same approach. Accordingly, before a policyholder decides to settle an underlying tort case over a defending insurer’s objection, it should carefully examine the state’s law which applies to the dispute. Otherwise, the policyholder risks unintentionally forfeiting its indemnity coverage.

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The Policyholder’s Right to Select Defense Counsel and Control the Defense

Amanda M. Leffler

When named as a defendant in a lawsuit, a policyholder naturally wants to be represented by an attorney that it trusts, who understands the nuances of its business, and who will protect the company’s interest to the exclusion of all others. But when the defense to a lawsuit is being paid for by an insurance company, the insurance company will frequently attempt to impose its choice of designated counsel upon the policyholder.

Many policyholders simply accept the counsel appointed by the insurer, without appreciating that, in certain cases, it is the policyholder, not the insurer, who has the right to select counsel. Though insurers frequently dispute the point, when an insurer reserves its rights or when the interests of the policyholder and the insurer otherwise conflict, the control of the defense and the right to select defense counsel rests with the policyholder.

Conflicts of Interest Are Common

Consider a fairly simple situation: A policyholder is named as a defendant in a suit that alleges that the company’s conduct was intentional or, alternatively, that the conduct was at least negligent, resulting in the plaintiff’s injury. If the jury in that case ultimately determines that the company acted intentionally, the insurer would not be required to indemnify the policyholder for the verdict because most policies exclude coverage for intentional injury. If the jury ultimately determined that the policyholder was negligent, however, the insurer would have to indemnify the policyholder. The insurer agrees to defend the claim, but reserves its right to later deny indemnity coverage if the policyholder’s conduct was intentional.

In the foregoing example, the interests of the policyholder and the insurer conflict. The policyholder, of course, would be best served if the jury returned a negligence verdict that would be indemnified by the insurer. The insurer, however, would be able to avoid indemnity coverage if the jury found that the policyholder acted so as to intentionally cause harm. This inherent conflict between the insurer and the policyholder means that the policyholder gets to select its own counsel to defend it in the lawsuit.

An Insurer’s Refusal to Acknowledge the Policyholder’s Rights

Some insurers are reluctant to acknowledge a policyholder’s right to select counsel when the insurer has reserved rights or when the interests of the policyholder and insurer otherwise conflict. Many insurers will prefer to select counsel, in part because they have negotiated low hourly rates with certain “panel” counsel.

If an insurer remains insistent that it has such a right, in spite of the Ohio law to the contrary, the policyholder has a decision to make. If the policyholder is satisfied both that the insurer-selected counsel is competent to handle the matter and that such counsel understands he or she represents only the policyholder, then the policyholder may be comfortable acceding to the insurer’s choice of counsel. But if the policyholder is not satisfied on these points, or if other circumstances compel the policyholder to use defense counsel of its choice, the policyholder typically will be better served to decline the insurer’s choice, retain its own counsel, sue the insurer for breach of contract and, if the circumstances are egregious enough, for bad faith.

The Bottom Line

If there is a potential conflict between you and the insurer, or another reason why you do not want to accept the insurer’s selection of counsel, consider the following:

• Is the insurer-appointed counsel competent in the field?
• Has the insurer-appointed counsel explicitly agreed that he or she represents solely the policyholder, and does not also represent the insurer, as required by the Ohio Rules of Professional Conduct?
• Will the insurer-appointed counsel expressly agree that he or she will protect all interests of the policyholder, including interests in regard to any insurance coverage issues or disputes?
• Has the insurer-appointed counsel agreed that he or she is prohibited from sharing any attorney-client or work product protected materials in the file that relate to the coverage dispute?

Determining the answers to these questions will better equip you to decide whether you will accept, or decline, the insurer’s selection of counsel.

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Attorney Highlights

The firm received the 2016 Best Law Firms ranking.

Christopher J. Carney, Clair E. Dickinson, Keven Drummond Eiber, Meagan L. Moore and Paul A. Rose were named to the Best Lawyers in America 2016.

Amanda M. Leffler, Anastasia J. Wade, Alexandra V. Dattilo, Gabrielle T. Kelly and David Sporar spoke at the Brouse McDowell 2015 Annual Insurance Coverage Conference on October 1, 2015 at The Embassy Suites in Independence, Ohio.

Amanda M. Leffler and Amanda P. Parker presented at the Patrolmen’s Benevolent Association Mid-States Meeting on November 12, 2015, on the topic of Insurance Coverage for Police Misconduct.

Kerri L. Keller was appointed to the City of Hudson Economic Growth Board.

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Follow the Leader: Possible Lessons for Ohio Policyholders from Oklahoma's Oil and Gas Insurance Experience

Matthew K. Grashoff

               Some people enjoy being trailblazers–boldly going where no one has gone before, to borrow a phrase. When it comes to insurance coverage, however, sometimes it pays, literally and figuratively, to let others go before you and learn from their mistakes. Ohio policyholders facing losses from fracking-related earthquakes currently have the option of doing just that, thanks to ongoing litigation in Oklahoma. 

 As activity in the oil and gas industry has grown in the past few years, the risks associated with the industry have grown as well. In particular, one emerging risk involves the occurrence of earthquakes in energy-producing areas that were not previously prone to seismic activity. Certain scientists argue that oil and gas activities, in particular the underground disposal of byproducts from the hydraulic fracturing or “fracking” process, could arguably be responsible for these earthquakes.

 The insurance industry has already begun to feel the effects of this rise in “induced seismicity,” the term for earthquake activity allegedly caused by oil and gas activities. According to a May 2015 article on the American Oil & Gas Reporter website, around 50 lawsuits related to alleged induced seismicity have been filed across the country, and that number is sure to rise in the future. In the Fall 2013 issue of Your Coverage Advisor, Brouse McDowell noted the need for policyholders to understand how their policies may or may not respond to claims for induced seismicity. Oil and gas producers have also begun reviewing their insurance coverage programs to ensure that they are covered in case of induced-seismicity lawsuits.

 Oklahoma is currently at the forefront of addressing induced-seismicity lawsuits. The state has been hit hard by alleged induced seismicity: in 2014 alone, the state experienced more earthquakes of magnitude 3.0 or higher–i.e. strong enough to be felt indoors–than in the previous 30 years combined. Surveys from the Oklahoma Insurance Department indicate that the percentage of Oklahomans with earthquake insurance has correspondingly increased as well, from approximately 2% in 2011 to between 15% and 23% in 2014. 

 Despite the growing popularity of earthquake insurance in Oklahoma, few claims are being paid.  According to a March 2015 bulletin by Oklahoma’s Insurance Commissioner, of the approximately 100 earthquake claims that were filed by Oklahoma policyholders in 2014, only eight were paid. The Commissioner’s office apparently believes that the insurers are denying claims based on a common exclusion of losses due to “man-made” causes, including “oil and gas exploration and production.” The bulletin cautioned insurers not to rely on the “unsupported belief that these earthquakes were the result of fracking or injection well activity” as the basis for denying claims.

 The ongoing story of Sandra Ladra provides an interesting case study. Ladra, a resident of Prague, Oklahoma, was injured in November 2011 during one of the strongest earthquakes in state history. Ladra sued two energy companies which operated nearby injection wells where fracking byproducts were disposed, arguing that their operation of the wells was the cause of her injuries. The trial court dismissed the action on jurisdictional grounds, reasoning that only the state agency charged with regulating the oil and gas industry had authority over cases relating to oil and gas operations. In a recent ruling that received national media attention, the Oklahoma Supreme Court reversed that decision, holding that Ladra’s right to seek a remedy for violation of her rights was not trumped by the agency’s authority to regulate the industry. 

 Ladra’s case is now back in the hands of the trial court, but she still faces major hurdles.  One of the most significant hurdles will be the issue of causation: who, or what, caused the earthquake that injured her? Since she is suing the oil and gas producers, Ladra must prove that their conduct caused the earthquakes–in effect, that the earthquakes were “man-made.”  Ladra’s complaint cites three scientific studies which she claims link the defendants’ injection wells to the induced seismicity, but the defendants will certainly produce other evidence showing that there is no proof of a connection between the two.

 If Ladra were seeking coverage under an earthquake policy, however, she would be faced with another set of problems: the same evidence she relied on to show that the induced seismicity was a “man-made” event caused by the defendants would be fatal to her claim because the earthquake policy would not cover man-made events. Although Ladra does not actually face the logical riddle described above, it is not difficult to imagine that a future plaintiff might. Courts will eventually have to confront the complex causation issues raised by induced-seismicity cases, and policyholders will have to learn how to best pursue the multiple available methods of recovery. It may well be that policyholders will be forced to choose a sole avenue of recovery: a suit against the entity that “caused” the earthquake, or a suit seeking coverage under an earthquake policy that posits the earthquake was caused by natural forces.

Ohio policyholders should be mindful of developments surrounding these issues in Oklahoma so that they can learn the shape the debate will likely take in Ohio. After all, no one likes to be the first person to arrive at a party–sometimes it’s safer to be fashionably late and follow someone else’s lead.

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Crime Insurance Coverage: Determining When a Loss is a "Direct Loss" Covered Under the Policy

Gabrielle T. Kelly

Most people understand the basic concept underlying crime insurance —that it is a form of fidelity insurance that insures commercial entities against the risk of loss by crime— though they are less clear on the type of losses that are covered by the policies.  Crime policies typically exclude losses that are “indirectly” suffered by the policyholder. An example of the language in these policies follows:

[This Policy excludes] Loss that is an indirect result of any act or occurrence covered by this Policy including, but not limited to, loss resulting from * * * payment of damages of any type for which the Insured is legally liable; But, this Company will pay compensatory damages arising directly from a loss covered under this Policy.

            Courts agree that the language in crime policies restricts coverage to direct losses, and that an organization suffers a direct loss when the organization has ownership rights as to the money or property that was taken. Jurisdictions differ, however, on the applicable standard for determining whether the policyholder suffered a direct loss when the policyholder does not have ownership rights, but is holding property owned by others. There is no controlling Ohio authority directly addressing what constitutes a direct or indirect loss under a crime policy, but the Sixth Circuit Court of Appeals has addressed the issue. In First Defiance Fin. Corp. v. Progressive Cas. Ins. Co., the court held that a policyholder incurred a direct loss resulting from the theft of customer funds held by the employer. In that case, the policyholder reimbursed customers that were the victims of fraud perpetrated by a former employee. The insurer denied coverage and asserted that the policy covered only losses incurred by the insured in the first instance. The court rejected the insurer’s argument and ruled that loss of assets for which the insured was responsible constituted a direct loss covered by the policy, regardless of whether the stolen items belonged to a third party.

            Conversely, in Lynch Properties, Inc. v. Potomac Ins. Co., the Fifth Circuit Court of Appeals rejected a policyholder’s assertion that it suffered a direct loss where the company’s losses resulted from its reimbursement of funds stolen by its employee from the personal bank accounts of the policyholder’s President. The Court held that crime policies were not intended to serve as liability insurance to protect employers against tortious acts committed against third parties by their employees. The loss suffered by the policyholder arose solely from its reimbursement of funds belonging to others, and was not the result of employee theft of the policyholder’s own property. Accordingly, the court found the loss too tenuous for coverage under the crime policy.

            Several jurisdictions have adopted the conventional proximate-cause test in determining whether an insured suffered a direct loss under a crime policy. For example, in Scirex Corp. v. Fed. Ins. Co., the Third Circuit Court of Appeals held that a policyholder suffered a “direct loss” within the meaning of an employee dishonesty policy when the insured was required to expend funds to repeat clinical drug trials for its clients due to its nurses’ falsification of records and failure to follow protocol. In ruling for the policyholder, the court noted that “direct loss” is a nebulous concept and that the proximate-cause analysis should be employed in determining whether the insured suffered a direct loss.

                 When an insured’s loss is based on the theft of property belonging to a third party or other unusual circumstances, the policy must be read very carefully. An insurer may seek to deny a claim because the loss was not “direct.” Coverage for the loss will depend on the policy language and the law applicable to the interpretation of the policy. Thus, if confronted with such an issue, it is advisable to contact coverage counsel to discuss coverage for the claim.

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Attorney Profile

Amanda M. Leffler

            Amanda M. Leffler, co-chair of Brouse McDowell’s Litigation Practice Group, has substantial experience in insurance coverage matters.  She frequently assists clients in negotiating payment of their insurance claims prior to litigation and, where necessary, prosecutes coverage cases against insurers who have denied claims.  Amanda takes a practical, business-minded approach to coverage matters, and has expertise in numerous types of disputes, including general liability, construction, directors & officers, property, asbestos, and environmental liability.  She also has diverse commercial litigation expertise including employment matters on behalf of employers, shareholder disputes, breach of contract, business torts, and zoning issues.

            Amanda is one of five Brouse attorneys certified as a Specialist in Insurance Coverage Law by the Ohio State Bar Association and is AV^® Preeminent Peer Review Rated through Martindale- Hubbell. She has been recognized as either a Rising Star or an Ohio Super Lawyer since 2009, through a peer- and achievement-based review. Amanda was also selected as one of the top 25 Women Cleveland Super Lawyers in 2015 and was recognized as one of the top 50 Women Ohio Super Lawyers in 2015.

            Active in the Akron and legal communities, Amanda is currently a member of the Board of Trustees of United Disability Services, and serves as Vice President of Membership and Secretary of the Akron Bar Association.  She has been active in the American Bar Association Insurance Coverage Litigation Committee, and currently serves as a Co-Chair of the Employment Sub-committee.  Amanda is also a recent graduate of Leadership Akron, Class 31.  When not advocating on behalf of her clients, Amanda is an avid reader, and enjoys spending time with her husband, Dan, and her daughters, Abigail (5) and Avery (3).

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Baseball, Ballparks, and Broker Liability

Kerri L. Keller

            Recently, the Sixth Circuit Court of Appeals upheld a trial court’s dismissal of a case against an insurance broker for allegedly failing to procure the proper liability insurance to cover an outdoor baseball event. In Johnson v. Doodson Ins. Brokerage, et al., the Sixth Circuit was asked to consider whether a broker could be held liable for negligence or breach of contract arising out of the broker’s procurement of an insurance policy that did not fully cover the events for which it was purportedly obtained. 

            In Johnson, the Cleveland Indians hired National Pastime Sports to produce a “Kids Fun Day” of events at the Indians games. The event featured children’s attractions and included an inflatable castle and an inflatable slide. The contract between the Indians and National Pastime required National Pastime to obtain a five-million-dollar comprehensive liability policy.  National Pastime used defendant Doodson Insurance Brokerage to obtain an insurance policy with New Hampshire Insurance. Although Doodson stated on the application that the events would include “inflatable attractions,” the policy specifically excluded coverage for injuries caused by “inflatable slides.”

            In an unfortunate turn of events, the decedent Douglas Johnson attended an Indians game in June of 2010. While he was looking at a display, an inflatable slide collapsed and crushed him. He died from his injuries just a few days later. When National Pastime informed Doodson of the accident, it was informed that accidents caused by inflatables were not covered under the policy.

            Multiple lawsuits ensued between all of the parties involved—National Pastime, the Indians, New Hampshire Insurance, Johnson’s estate, and Doodson. In one of the lawsuits, Johnson’s estate obtained a default judgment against National Pastime for $3.5 million dollars.

            The remaining suits between National Pastime, the Indians, Doodson, and New Hampshire Insurance all eventually settled. Johnson’s estate, however, was unable to collect upon its judgment against National Pastime and eventually sued Doodson in Michigan federal court for negligence and breach of contract resulting from Doodson’s failure to obtain a policy for National Pastime that covered injury from inflatable slides. 

            Analyzing the matter under the laws of the states of Michigan and Texas, the appellate court came to the following conclusion—Doodson could not be held liable to Johnson’s estate under either negligence or breach of contract for its failure to obtain an insurance policy for National Pastime that would have covered Johnson’s injuries. According to the Sixth Circuit, Doodson owed no independent legal “duty” to Johnson. The court noted that one’s negligence in carrying out a contractual obligation may result in liability to a third-party, such as Johnson, but usually only where the defendant’s negligence increases a risk of harm to the third-party. According to the court, “[Doodson’s failure] to perform a contractual obligation to procure insurance against suits by injured parties does not implicate a risk of harm that [Doodson] had any common law duty to prevent.” 

            The court also found that Johnson was not an “intended third-party beneficiary” of the insurance policy because “neither [he] nor a class of which he was a member was directly referred to in the contract.....”  Rather, as the court noted, Johnson was merely a member of the “public at large,” a class that the Michigan Supreme Court had already determined was “too broad” of a class to qualify as an intended third-party beneficiary of a contract. 

            As the court noted, Doodson’s liability in this case was really to the Indians and National Pastime—not to Johnson or his estate. While Johnson’s death was a tragedy, and his estate unable to collect on its judgment against National Pastime, Doodson was not legally responsible to Johnson in either tort or contract for its failure to ensure that National Pastime obtained proper liability coverage. 

            The take-away from Johnson, is that while brokers are clearly not insulated from liability—either to those with whom they are liable in contract or in tort, or those with whom they are not—third parties may face insurmountable hurdles when trying to hold a broker liable for failing to obtain sufficient insurance coverage for its client. As this case establishes, Doodson did not owe a duty to Johnson where it did not take any actions that increased the risk of harm to Johnson or where he was not a named or intended beneficiary of the contract between National Pastime and the Indians.   

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Attorney Highlights

Matthew K. Grashoff was selected as Counsel to the Appellate Rules Committee of the Supreme Court Commission on the Rules of Practice and Procedure.

Matthew K. Grashoff was selected for the Akron Bar Association Leadership Academy.

Kerri L. Keller spoke at the National Business Institute Seminar – The Rules of Evidence: A Practical Toolkit – Ethical Considerations in April 2015.

Kerri L. Keller was appointed as a member of the Advisory Group of the U.S. District Court, Northern District of Ohio in July 2015. 

Gabrielle T. Kelly spoke on bad faith and the tripartite relationship at the NBI seminar “Personal Injury Claims: the Insurance Defense Perspective” on Friday, August 14, 2015.

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Coverage for Punitive Damages

Andrew P. Moses

Whether liability insurance policies provide coverage for punitive damages depends not only on the language of the policies, but also on public policy considerations as expressed in both state statutes and case law handed down by state courts.

The starting point for every coverage analysis is the language of the insurance policy. With respect to coverage for punitive damages, it may also be the end point. Some insurance policies contain explicit exclusions for punitive or exemplary damages. Other insurance policies contain definitions of “Loss” or “Ultimate Net Loss” that explicitly carve out punitive or exemplary damages. Courts will give effect to such explicit policy language.

Many policies, however, are silent when it comes to punitive damages, neither explicitly providing coverage for them, nor explicitly excluding them. Insurers who have issued such policies may nonetheless take the position that such damages are not covered on the grounds that coverage would violate public policy.

Under Ohio law and under the law of many states, the nature of the punitive damages determines whether insurance for such damages violates public policy, and courts have not articulated a clear rule of law that would apply in every case. Generally, where punitive damages are awarded against a party to punish that party for its own malicious or egregious conduct, that party will not be able to obtain insurance coverage for such punitive damages. In other situations, however, such as when an employer is vicariously liable for punitive damages, or when the damages are awarded pursuant to a statute that does not require proof of malice, courts have refused to preclude coverage on public policy grounds.

Typically, one looks to the law of the state where the underlying claim is brought to determine the nature of the punitive damages. For example, in New Jersey, an award of punitive damage is governed by statute, specifically the Punitive Damages Act, N.J.S.A. 2A: 15-5.9 through 5.17. New Jersey law requires that in order for punitive damages to be awarded, the plaintiff must prove by clear and convincing evidence that:

the harm suffered was the result of defendant’s acts or omissions, and such acts or omissions were actuated by actual malice or accompanied by a wanton and willful disregard of persons who may foreseeably be harmed by those acts or omissions. This burden of proof may not be satisfied by proof of any degree of negligence including gross negligence.

N.J.S.A. 2A:15-5.12.

A different state’s law may apply to the question whether coverage for the punitive damages violates public policy. The law that applies to this coverage question may be the law of the state of which the policyholder is a citizen, the state where the insurance contracts were negotiated and delivered, or another state that has a significant interest in the coverage question. Because insurance coverage law varies dramatically from state to state, counsel for policyholders and insurers alike should fully analyze the choice-of-law issue before reaching any conclusion on the substantive coverage question.

The law of different jurisdictions as to the insurability of punitive damages varies and, even within some states, the insurability of punitive damages can vary depending on the type of insurance at issue and the elements of the punitive damages claim. In Ohio, for example, both statutory and common law govern the insurability of punitive damages. The Ohio legislature has enacted R.C. 3937.182, which provides as follows:

(B) No policy of automobile or motor vehicle insurance that is covered by sections 3937.01 to 3937.17 of the Revised Code, including, but not limited to, the uninsured motorist coverage, underinsured motorist coverage, or both uninsured and underinsured motorist coverages included in such a policy as authorized by section 3937.18 of the Revised Code, and that is issued by an insurance company licensed to do business in this state, and no other policy of casualty or liability insurance that is covered by sections 3937.01 to 3937.17 of the Revised Code and that is so issued, shall provide coverage for judgments or claims against an insured for punitive or exemplary damages.

Ohio Rev. Code § 3937.182(B).

Ohio case law also prohibits coverage for punitive damages awarded where the insured’s actions were malicious. Wedge Prods., Inc. v. Hartford Equity Sales Co., 31 Ohio St.3d 65, 67 (1987); see also Neal-Pettit v. Lahman, 125 Ohio St.3d 327, 331 (2010) (“It is true that public policy prevents insurance contracts from insuring against claims for punitive damages based upon an insured’s malicious conduct.”). Because the purpose of punitive damages is “to punish an offender for the wanton, reckless, malicious or oppressive character of the act committed and to deter others from committing similar acts,” there is a public policy interest against allowing offenders to transfer responsibility to its insurance company. Casey v. Calhoun, 40 Ohio App.3d 83, 84 (8th Dist. 1987); see also Ruffin v. Sawchyn, 75 Ohio App. 3d 511, 518 (8th Dist. 1991)(settlement that purported to satisfy punitive damages award with payments from codefendant’s insurer was void.); Stephens v. Grange Mut. Ins. Co., 2nd Dist. No. 2011 CA 102, 2012-Ohio-4980, 28 (“Punitive damages are not insurable, and the use of insurance proceeds to satisfy an award of punitive damages is against public policy.”); World Harvest Church v. Grange Mut. Ins. Co., 10th Dist. No. 13AP-290, 2013-Ohio-5707.

The question is less settled in other jurisdictions. For example, in New Jersey, some courts have held that punitive damage awards intended to punish the insured for the insured’s malicious acts are not insurable. In Johnson & Johnson v. Aetna Cas. & Sur. Co., 285 N.J. Super. 575, 585, 667 A.2d 1087 (N.J. App. 1995), the court stated that “New Jersey sides with those jurisdictions which proscribe coverage for punitive damage liability because such a result offends public policy and frustrates the purposes of punitive damage awards. Id., 583, citing Variety Farms, Inc. v. New Jersey Mfrs. Ins. Co., 172 N.J. Super. 10, 13, 410 A.2d 696 (App. Div. 1980); Leimgruber v. Claridge Assocs., 73 N.J. 450, 454, 375 A.2d 652 (1977). There, however, also is some authority in New Jersey that punitive damages may, in some situations, be insurable. Chubb Custom Ins. Co. v. Prudential Ins. Co. of America, 195 N.J. 231 (N.J. 2008).

In other states, the courts have held that it does not violate public policy to insure punitive damage awards. For example, Georgia courts have repeatedly held that it does not violate public policy to insure punitive damages. See, e.g., Greenwood Cemetery, Inc. v. Travelers Indem. Co., 238 Ga. 313 (1976); Lunceford v. Peachtree Cas. Ins. Co., 230 Ga.App. 4 (1997).

Even those states that have found it against public policy to insure punitive damages awarded against an insured directly, to punish the insured for its own wrongful conduct, may not find that all punitive damage awards are uninsurable. This is the case in Ohio where, despite the language of Ohio Rev. Code 3937.182(B), several courts have held that punitive damages are insurable when there is no finding of malice or ill will. These courts look beyond the breakdown of damages to the reason punitive damages were imposed to determine their insurability. In cases where punitive damages were imposed by statute and the policyholder did not commit malice or ill will, an Ohio court will allow insurance coverage. For example, in The Corinthian v. Hartford Fire Ins. Co., 143 Ohio App.3d 392 (8th Dist. 2001), the Eighth District Court of Appeals analyzed the insurability of punitive damages in a personal injury and wrongful death suit arising from a violation of a patient’s statutory rights. The court contrasted the case with Casey v. Calhoun, supra, and held that although Ohio public policy precludes coverage when an individual seeks to insure “against his own intentional or malicious acts,” indemnification is permitted when there is a statute at issue and no actual malice. Id.

Additionally, in Foster v. D.B.S. Collection Agency, Case No. 01-CV-514, 2008 WL 755082 (S.D. Ohio Mar. 20, 2008), the Southern District of Ohio considered whether punitive damages stemming from the insured’s debt collection actions were covered. In that case, the policyholder was a debt collection agency that was sued for its methods of collecting debts. The plaintiff alleged fraud, violation of the Ohio Consumer Sales Practices Act, and other related claims. Relying on The Corinthian, the court held that “Ohio law does not prohibit insurance coverage of punitive damages in all cases,” particularly those pursuant to a statute and without any finding of malice. Foster, at *9. Furthermore, the court noted that the policy language at issue in the case was more persuasive than in The Corinthian, because the insured’s policy explicitly included coverage for punitive damages. Id. Thus, policies construed under Ohio law may provide coverage for punitive damages, particularly when the policies expressly provide such coverage and punitive damages are assessed against the policyholder without a finding of malice or ill will.

Many other courts in other jurisdictions have found that public policy allows punitive damages to be covered by insurance in certain settings. Commonly, where an employer is vicariously liable for the acts of a non-management level employee, courts have permitted the employer’s liability for punitive damages to be covered by insurance. For example, in Celotex Corp. v. AIU Ins. Co., 152 B.R. 652 (Bankr.M.D.Fla.1993), the court found that “insurance coverage will not be available for punitive damages related to asbestos-related property damage where those punitive damages are imposed upon Debtor for wrongs committed directly by Debtor. However, coverage is available where punitive damages are incurred by Debtor based upon Debtor’s vicarious liability provided the relevant insurance policy affords coverage for punitive damages.” Applying Florida and Ohio law, the court reasoned that in those states:

[P]ublic policy bars coverage for punitive damages where those damages were imposed due to wrongdoing committed by the insured. U.S. Fire Ins. Co. v. Beltmann N. Am. Co., 695 F. Supp. 941 (N.D. Ill. 1988), rev’d on other grounds, 883 F.2d 564 (7th Cir. 1989); Beaver v. Country Mut. Ins. Co., 95 Ill. App. 3d 1122, 420 N.E.2d 1058, 51 Ill. Dec. 500 (Ill. App. Ct. 1981); Casey v. Calhoun, 40 Ohio App. 3d 83, 531 N.E.2d 1348 (Ohio Ct. App. 1987); State Farm Mut. Ins. Co. v. Blevins, 49 Ohio St. 3d 165, 551 N.E.2d 955 (Ohio 1990). Both states, however, create a vicarious liability exception. U.S. Fire Ins. Co., 695 F. Supp. at 949; Beaver, 420 N.E.2d at 1061; Blevins, 551 N.E.2d at 958.

Other states also recognize such an exception. See, e.g., First Nat’l Bank of St. Mary’s v. Fidelity & Deposit Co., 283 Md. 228, 389 A.2d 359 (Md.1978); Continental Ins. Co. v. Hancock, 507 S.W.2d 146 (Ky.1973). The rationale in such decisions is that the public policy does not prohibit insurance coverage for punitive damage awards against parties who did not engage in the reprehensible conduct because the purpose of punitive damages -- deterrence and punishment of the wrongdoer -- would not be thwarted in such situations. That was the point in Chubb Custom Ins. Co. v. Prudential Ins. Co. of America, 195 N.J. 231, 245, fn.3 (2008), in which the court observed that statutory and case law in New Jersey provided some authority that where an insurance policy provides coverage for punitive damages, and where the punitive damages award does not fulfill the purpose of punishing the wrongdoer, it would not violate the public policy of New Jersey to allow coverage for the punitive damages.

Punitive damage awards are often calculated by tripling the amount of compensatory damages and are a significant risk in many types of litigation. The evaluation of whether insurance will extend to such damages requires a careful examination of the policy language, a thorough choice-of-law analysis, and an up-to-the-minute evaluation of the law of the applicable jurisdiction. Don’t just take your insurer’s word for it.           

* Andrew Moses acknowledges, gratefully, Gabrielle T. Kelly and Amanda M. Leffler for their contributions to this article.

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Insurance Coverage Basics for Contractors

James T. Dixon

Construction contracts inevitably contain detailed insurance provisions intended to allocate risk and provide for coverage. Contractors must have a basic understanding of insurance terminology and insurance coverage principles when presented with contracts for execution, or when preparing their own contracts for their subcontractors and suppliers. All too often, insurance misunderstandings results in trouble down the road.

What Types of Insurance Should Be Purchased?

Contractors generally obtain commercial general liability (“CGL”) insurance, along with commercial auto and workers’ compensation insurance. Design professionals typically also obtain errors and omissions (“E&O”) liability insurance. These policies provide protection, including both defense and indemnity, from liability in the event of an accident or “occurrence” which results in property damage or injury. Owners of the property being developed should have first-party property insurance, which protects the owner in the event of loss or damage to the owner’s property. For a specific development or building project, an owner may elect to purchase, or require the contractor to purchase, a Builder’s Risk policy. For large projects, a more comprehensive Owner-Controlled Insurance Program (“OCIP”) or a Contractor-Controlled Insurance Program (“CCIP”), which provides insurance for all project participants, may be appropriate. Such insurance programs are sometimes referred to as “wraps.”

What are Policy Limits?

The limit of a policy is the amount it will pay in the event of a loss. Limits are usually expressed as being for “each occurrence” and/or in the aggregate for the term of the policy. Sometimes an aggregate limit is provided for a particular construction project. A policyholder can obtain additional limits of insurance by purchasing umbrella insurance which may provide broader coverage as well. Limits can also be extended higher with excess insurance.

The limits of the policy are typically set forth on the declarations page of the policy. Construction contracts generally will specify the limits, or the amount of coverage, the parties are required to maintain.

What is the Difference Between Claims-Made and “Occurrence” Policies?

A “claims-made” policy generally will provide coverage for claims first asserted against the insured and reported to the insurance company during the period of the policy. An “occurrence” policy generally will provide coverage if the injury or property damage takes place during the period of the policy, regardless of when the claim is made. Both types of policies are available, and contractors should be very careful not to inadvertently create gaps in coverage when switching from one kind to another.

What Should I Do If I Have A Claim?

Insurance policies always include provisions obligating you to provide prompt notice to the insurance company, and to cooperate with the insurance company’s handling of the matter. You should notify your insurer as soon as possible after you become aware of a problem that may be covered by the insurance. If you are sued, you should send the suit papers to your insurer immediately and request that your insurer defend and indemnify you. It is a good idea to also include your insurance broker or agent on these communications. In many instances, your broker or agent may provide your insurer notice on your behalf.

What Does Defend and Indemnify Mean?

Even groundless lawsuits can be expensive to defend. If your insurance policy provides that your insurer is obligated to defend you, that usually means retaining and paying an attorney to represent you, and paying other costs and expenses incurred for the defense. In the unfortunate event you are found liable, or you and your insurer decide to settle, your insurer indemnifies you by paying the amount of the settlement or judgement, up to the limits.

What Should I Expect After I Notify My Insurer Of A Claim?

Once you submit a claim, your insurer should either (1) unconditionally acknowledge its insurance obligations, (2) acknowledge its defense obligation, but reserve its right to disclaim coverage for reasons that it should explain in writing in what is called a “reservation of rights” letter, or (3) decline to provide coverage, again for reasons that it should explain in writing. Unless there has been a denial, your insurer should then appoint a lawyer to defend the contractor and pay that attorney’s bills. In some instances, the reasons in a reservation of rights letter may mean that you can and should hire your own attorney and submit his or her bills to the insurance company for payment.

The insurance company may hire its own attorney to analyze any coverage issues. The insurance company may also decide to intervene in the lawsuit in order to have the court decide any dispute over coverage. Or, you or the insurance company may file a separate lawsuit for the same purpose.

Should I Respond to a Reservation of Rights?

Always carefully review and respond, in writing, to a reservation of rights letter. Where the amount at stake is significant, consult with an independent attorney who is experienced with insurance coverage disputes from your perspective.

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Decision Points

Sallie Conley Lux

Legal decisions interpreting laws, statutes, and insurance policies provide guidance on the meaning of various provisions in insurance policies and whether or not a particular happening may or may not be covered. A few recent legal decision points of note follow:

The Rest of the Story:

The most recent issue of “Your Coverage Advisor” included an article about the “Impact of ‘Presumptive Intent’ on Coverage.” Subsequently, on March 14, 2015, the Ohio Supreme Court issued a decision in Hoyle v. The Cincinnati Ins. Co., 2015-Ohio-843 reversing prevailing Ohio Court of Appeals law that an employer’s “presumptive intent” intentional torts were covered under the employer’s insurance policy.

The Facts:

Hoyle was injured in the workplace when he fell from a “ladderjack” scaffold, landing on a concrete floor. Although the ladders were typically secured in place by a bolt, Hoyle claimed that his supervisor “kept the bolts in [an] office and told employees they did not need them because they take too much time to use.”

Under RC 2745, an employee may recover for an employer intentional tort injury either through direct evidence (the employer’s deliberate intent to injure or belief that injury is substantially certain to occur), RC 2745(A) and (B), or through proof that establishes a statutorily created rebuttable presumption of intent to injure where the employer deliberately removes an equipment safety device. RC 2745(C). Hoyle had asserted a “presumptive intent” claim under RC 2745(C).

The Policy:

Cincinnati issued a CGL policy to the employer that included, for an additional premium, Ohio form Employers Liability Insurance (“ELI”). The Ohio ELI form covered employee workplace injuries “caused by an ‘intentional act’ to which this insurance applies.” “Intentional” was defined as “an act which is substantially certain to cause ‘bodily injury.’” The Ohio ELI form explicitly excluded from coverage “liability for acts committed ... with the deliberate intent to injure.” Thus, the Ohio Form purported to provide coverage for “substantial certainty,” or “presumptive intent” claims, but not direct intent claims.

The Result:

Notwithstanding the distinction between intentional acts and intentional injury in the Ohio ELI form, the Ohio Supreme Court found no such distinction in the language of the statute. Thus, regardless of whether a claim is brought under RC 2745(C) instead of RC 2745(A) or (B), “intent to injure” is an essential element of the claim. Accordingly, “[a]n insurance provision that excludes coverage for acts committed with the deliberate intent to injure an employee precludes coverage for [all] employer intentional torts, which require a finding that the employer intended to injure the employee.” Id., syllabus.

Only three Justices joined in the opinion, with two others concurring only in the judgment and syllabus. Two Justices dissented: “Can this court truly countenance an insurance company’s assertion that it should be permitted to collect a premium for an event that is never going to happen?” Hoyle at 44. The dissenting opinion found it significant that the Ohio ELI form at issue did not limit the definition of intent to mean deliberate intent, thus observing that an employer could be found liable for an intentional tort under RC 2745, and still be covered by the language of the policy.

The “Practical Effect”:

A majority of the Justices (the two concurring and the two dissenters) agreed that “as a result of this decision, ‘[t]here is now nothing less than deliberate intent[.]’” Id. at 41. The practical effect of Hoyle is that while injured employees have a very difficult burden of proof, if they meet that burden, their employers will have not have the coverage they thought they purchased.

Who is a “Resident Relative”?

The adult son (Robert) of the insureds (Jean and James) was involved in a car accident that resulted in a death. He sought additional coverage in a subsequent wrongful death suit under his parents’ umbrella policy, claiming to be a “resident relative.” Robert lived in Ohio in a house he co-owned with Jean. Jean also owned a home in Florida, where she lived permanently. James lived part-time in Florida, and part-time in Ohio. James considered Florida his residence and home (he voted there, had his social security deposited in his bank accounts there, had a Florida driver’s license, did not pay Ohio taxes, was careful to comply with Ohio law limiting time in Ohio to avoid a presumptive tax domicile, etc.), but he spent significant time, approximately 2 weeks per month, in Ohio, running his business. When in Ohio, he lived at Robert and Jean’s house, for which James paid the insurance and utilities. James also used that Ohio address for one of his businesses.

Cincinnati issued an umbrella policy, naming Jean and James as the “insureds,” and the Ohio house as their address. The policy extended coverage to the insureds, and to “resident relatives” for an “occurrence” involving a car owned by the resident relative. A “resident relative” included a person “that is a resident of ‘your’ household and whose legal residence of domicile is the same as [the insured’s].”

Coverage for Robert’s accident boiled down to whether James was domiciled in Ohio or Florida, which under Ohio law is a very fact-intensive inquiry. Ultimately finding that James was domiciled in Florida, which meant Robert’s accident was not covered, the Ohio Supreme Court explained that a person’s domicile is “where he has his true, fixed, permanent home and principal establishment, and to which, whenever he is absent, he has the intention of returning.” A person’s intent is essential, as a person can reside in one place, but be domiciled in another. The Court further cautioned that the motive behind the intent to establish a domicile is immaterial. Schill v. Cincinnati, Ins. Co., 2014-Ohio-4527

Are Bicyclists Pedestrians?

Ohio courts have reached different results. The Court of Appeals for the Fifth District, which includes much of central Ohio, recently said “No.” Dye v. Grose, 2015-Ohio-1001 (March 12, 2015). Dye was injured in a collision with a car while riding his bicycle. Nationwide issued an auto policy to Dye that extended coverage “for medically necessary services, regardless of who was at fault, for treatment of accidental injury suffered by insureds, ‘as pedestrians if hit by any motor vehicle.’” Although the term “pedestrian” was not defined in the policy, the court observed that that did not mean that the policy was ambiguous, which would have mandated construction in favor of the insured (Westfield Ins. Co. v. Hunter, 2011-Ohio-1818). The court concluded that a bicyclist was not a pedestrian for purposes of coverage under the policy. In reaching its decision, the court recognized, but attempted to distinguish, Schroeder v. Auto Owner’s Ins., Co., 2004-Ohio-5667, a decision from the Sixth District Court of Appeals which includes Toledo and much of northwestern Ohio. That court reached the opposite conclusion, determining the term “pedestrian” to be ambiguous and to include a bicyclist. The dissenting Judge in Dye agreed with Schroeder, observing that using the definition advanced by Nationwide could result in the conclusion that “a person struck while traveling in a wheelchair” would not be covered. Or “a person pushing a baby in a stroller would be covered if struck by a car while the baby would not.”

The inconsistent decisions by these two Courts of Appeals could mean that the Ohio Supreme Court will agree to consider this issue.

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Attorney Profile

Caroline L. Marks

Caroline L. Marks - a graduate of the University of Virginia and Case Western Reserve University School of Law - joined Brouse McDowell in 2006, after having clerked for both the Ohio Supreme Court and the Ohio Ninth District Court of Appeals. As a member of the Insurance Recovery and Litigation Practice Groups, Caroline devotes her practice to representing clients in complex insurance recovery litigation involving a wide range of coverage issues and in appellate proceedings.

Caroline is certified as a Specialist in Insurance Coverage Law by the Ohio State Bar Association and was appointed to the Insurance Coverage Law Specialty Board. She has been recognized as either a Rising Star or an Ohio Super Lawyer every year since 2012, through a peer- and achievement-based review. In addition, Caroline regularly authors insurance-related articles for various publications and is an active member in the Cleveland legal community, participating in the Cleveland Metropolitan Bar Association’s Insurance Coverage Law Section and the Judge John M. Manos Inn of Court.

When Caroline is not advocating on behalf of her clients, she enjoys playing racquet sports and captains a USTA team for the Cleveland Racquet Club. She also enjoys hiking with Harry, her Golden Retriever and spending time with her family in Chautauqua, NY.

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Attorney Highlights

Keven Drummond Eiber was one of the luncheon speakers at the American Bar Association 2015 Insurance Coverage Law Seminar in Tucson, Arizona, speaking on issues relating to litigating coverage questions in federal courts. Paul A. Rose also was a speaker on issues related to forum selection. Caroline L. Marks attended the three-day seminar, as well.

Paul A. Rose addressed the Ohio Chapter of the Society of Corporate Secretaries & Governance Professionals in March, 2015, addressing litigation planning and privilege issues.

James T. Dixon has stepped up as one of Brouse McDowell’s two “Partners in Justice,” along with David Sporar. Jim and David serve as the firm’s ambassadors to the Legal Aid Society of Cleveland.

Andrew P. Moses, a member of the Regional Leadership Council for the American Lung Association, helped create the Cleveland Asthma Games. In its second year, the Asthma Games is a free event which provides pulmonary function testing for children, consultation with pulmonologist and nurses, education for parents about asthma and lung health, and provides a play day of various sports and fun activities with former Ohio State and NFL football players. The Games take place on June 6, 2015 at Cleveland Central Catholic High School.

Lucas M. Blower welcomed their new baby girl, Lucy Marie, on February 20, 2015.

Save the date!

Insurance Coverage Conference

October 1, 2015 | 1:30 P.M. to 5:30 P.M.
Location:
Embassy Suites Independence
5800 Rockside Woods Blvd.
Independence, OH 44131

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Recovering Your Attorneys’ Fees in an Insurance Coverage Case

Amanda M. Leffler

A denial of insurance coverage has immediate and sometimes severe consequences for a policyholder. A wrongful denial by the insurer leaves the policyholder to fend for itself, requiring the policyholder to cover the attorneys’ fees associated with defending actions brought against the policyholder by third parties, as well as the cost of the loss.

Adding insult to injury, the policyholder then must incur attorneys’ fees and costs in prosecuting a coverage action against its insurer in order to obtain the insurance coverage for which it paid. The total cost when an insurer wrongfully denies coverage can place substantial financial strain upon a policyholder.

In Ohio, however, policyholders have a powerful weapon available to them to fight against insurers that deny covered claims: policyholders may recover from their insurers the costs and attorneys’ fees incurred in successfully prosecuting coverage actions, even in the absence of bad faith. Ohio generally follows the American Rule with regard to the recovery of attorneys’ fees in civil actions – a prevailing party in a civil suit generally may not recover its fees and costs associated with the litigation. In the context of insurance coverage cases, however, Ohio recognizes two exceptions to the general rule.

Breach of Contract Exception

An insurance policy is a contract and most disputes between policyholders and insurance companies present possible claims for breach-of-contract. Actions for breach of insurance contracts differ from other breach-of-contract actions, however, in certain important respects. One difference recognized by the Ohio Supreme Court is that Ohio law requires an award of attorneys’ fees to a policyholder that prevails against its insurer in a breach-of-contract action, Motorists Mutual Insurance Company v. Trainor (1973), 33 Ohio St. 2d 4; Allen v. Standard Oil Co. (1982), 2 Ohio St.3d 122, 126.

The rationale for allowing recovery of attorneys’ fees under these circumstances is that “the insured must be put in a position as good as that which he would have occupied if the insurer had performed its duty,” Allen, supra. This basis for recovering attorneys’ fees is significant in that it does not require the policyholder to demonstrate any impropriety on the insurer’s part - the insurer’s good or bad faith in reaching its coverage decision is irrelevant.

Bad Faith Exception

Policyholders may also recover the attorneys’ fees incurred in prosecuting a bad faith action. Contrary to the claim of some insurers, in order to recover its attorneys’ fees as compensatory damages, a policyholder is not required to prove the existence of any additional compensatory damages separate and distinct from those fees. Therefore, the fact that a jury may not award any additional damages will not preclude a policyholder from recovering its attorneys’ fees as compensatory damages. Nor is a policyholder required to prove actual malice in order to recover its attorneys’ fees.

Declaratory Judgment Actions

In 1999, the Ohio Declaratory Judgment Act was amended by enacting 2721.16, which provides, “A court of record shall not award attorney’s fees to any party on a claim for declaratory relief,” except in narrow circumstances that typically would not include insurance coverage actions. Because insurance coverage actions typically include claims for declaratory relief, insurers sometimes will argue that this amendment nullifies the right of policyholders to recover their attorneys’ fees when they prevail against their insurers in coverage disputes. These arguments have been rejected by Ohio courts. See e.g. Cremeans v. Nationwide Mut. Fire Ins. Co. (7th Dist. 2000), 2000-Ohio-2612; National Eng. & Contr. Co. v. U.S. Fidelity & Guar. Co. (10th Dist. 2004), 2004-Ohio-2503 at 23; Judge Richard Markus, Trial Handbook for Ohio Lawyers 34.19 (statutory change does not affect recovery of attorneys’ fees in for breach of insurance contract).

When a policyholder has a claim for breach of contract or anticipatory breach of contract, in addition to the claim for declaratory relief, the policyholder will still be able to recover attorneys’ fees if the policyholder prevails on the contract claim. The reason for this is simple. On its face, 2721.16 applies only to claims for declaratory relief and does not purport to modify the Ohio Supreme Court’s decisions in Trainor and Allen.

The pronouncements from the Ohio Supreme Court are unequivocal. Because this feature of Ohio law is not widely known or understood, however, from time to time lower courts, particularly federal courts, fail to properly apply this law. Policyholders can greatly enhance their prospects of recovering these fees and costs by properly raising and advocating this issue, such as by citing to controlling law discussed above.

Policyholders and their counsel maintain a strong argument that policyholders are entitled to attorneys’ fees, even in the absence of insurer bad faith, when insurers breach their policies of insurance. As a result, policyholders are wise to assert breach-of-contract claims, or anticipatory breach-of-contract claims, whenever appropriate to do so, and to request attorneys’ fees in conjunction with those claims.

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Sony’s Second Data Breach: Insurance against Cyber Risks after Zurich v. Sony.

Lucas M. Blower

The Guardians of Peace, a group of hackers who, according to the FBI, have ties to the government of North Korea, are believed to be the ones that recently infiltrated Sony’s computer network, bringing the company to an electronic standstill. The hack reportedly was in retaliation over The Interview, a movie produced by Sony Pictures that depicts the assassination of the North Korean dictator, Kim Jong Un. The cyber-terrorists not only paralyzed Sony’s computers for days, but they also made off with 100 terabytes of data from Sony’s servers. Soon after the attack, the hackers began leaking stolen information on the internet.

Predictably, lawsuits followed. According to CNN, at least four class action lawsuits were filed against Sony in response to the cyber-attack between December 15-19, 2014. At this point, estimates vary as to how many plaintiffs may be part of these class actions. But at least one of the complaints alleges that the information of over 47,000 past and present Sony employees was posted online.

With potentially huge liabilities looming, Sony is very likely reviewing its insurance policies to determine whether it might have coverage against the hack. This is a familiar position for the company.

In April 2011, Sony was the victim of another enormous data-breach, compromising millions of user accounts from its PlayStation video game network. Sony later made a claim to its insurers under its commercial general liability (“CGL”) policies, arguing that it was entitled to a defense against the dozens of class-action lawsuits that cropped up after it was hacked. Its insurer denied the claim, and brought suit against Sony in New York for a declaration that there was no coverage.

In early 2014, the New York court ruled against Sony. In its opinion, given on the record, the court analogized the data-breach to letting information out of a secure box. The Court concluded that CGL policies provide coverage only where the policyholder opens the box through its negligence. But because Sony was the victim of third-party hackers - who criminally got in the box, “opened it up and ... took the information” - the Court concluded there was no coverage under the policy. Zurich v. Sony, No. 651982/2011, Hr’g Tr. 77 (N.Y. S.Ct. Feb. 21, 2014).

Though there is no standard cyber-risk policy currently available, in general, policyholders can purchase insurance that protects against the following risks:

• Data Breach
• Regulatory Investigation
• Misappropriation of Intellectual Property
• Transmission of Malicious Code
• Data Recovery
• Business Interruption
• Extortion

The Zurich decision is currently on appeal. But whatever the outcome, its impact will be limited in light of new policy language designed to exclude losses for data-breaches. ISO, which drafts form policy language for insurers, has prepared a mandatory endorsement to its standard CGL policies that excludes injuries “arising out of any access to or disclosure of any person’s or organization’s confidential or personal information...”

Cyber insurance is filling the gap. But policyholders should know that some cyber policies contain provisions that may defeat the purpose for obtaining coverage in the first place. For example, some policies may over-restrict the coverage territory, such that they apply only to claims made in the United States. The internet is international, so in order to truly protect against all risks, the policyholder needs coverage against claims no matter where they are made.

Further, some policies contain exclusions for “failure of security,” which require the policyholder to maintain certain minimum levels of data security, or else forfeit coverage. Depending on how broadly these provisions are worded, they may make the insurance hardly worth the cost. After all, the main reason to buy cyber insurance is to protect against the risk that the policyholder’s security measures will fail, either through negligence or otherwise.

If your company collects sensitive data, as most companies do, at least with respect to their employees, you may want to purchase one of the various cyber policies. Work with your insurance broker to identify which policy is right for you.

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Policyholders Should be Aware of the Impact of “Presumptive Intent” on Coverage

Charles D. Price, Kyle A. Shelton

Under Section 2745.01 of the Ohio Revised Code, an employer’s intentional tort liability is limited to the rare situation where it acts with “deliberate intent” to injure the employee. Proving deliberate intent, however, is extremely difficult. Consequently, employees increasingly rely upon R.C. 2745.01(C), sometimes called the “equipment safety guard” provision, which provides that an employer’s deliberate removal of an equipment safety guard creates a rebuttable presumption that the employer intended to cause injury. It essentially allows a court to assume the employer intended to injure the employee even if no direct proof of deliberate intent exists —requiring the employer to then disprove intent.

Recently, in Liberty Mutual Fire Insurance Co v. Ivex Protective Packaging, the Southern District of Ohio addressed whether a claim under R.C. 2745.01(C) was covered by an employer’s insurance policy that specifically excluded bodily injuries “intentionally caused or aggravated” by an employer-insured. The coverage dispute stemmed from an underlying lawsuit involving an Ohio manufacturing plant employee who was seriously injured when a machine malfunctioned due to the lack of proper safety guards. The employee sued Ivex, his employer, alleging that Ivex intentionally caused his injuries by removing the safety guards. The parties eventually settled and agreed that Ivex’s liability was limited to a disputed violation of R.C. 2745.01(C).

Ivex requested defense and indemnity from Liberty Mutual under the terms of its Workers Compensation and Employer Liability Insurance Policy. Liberty Mutual denied coverage and filed a coverage action seeking a declaratory judgment that it had no duty to defend or indemnify Ivex because the policy specifically excluded bodily injury “intentionally caused or aggravated” by Ivex. Ivex disputed this conclusion relying on the Ohio Court of Appeals’ decision in Hoyle v. DTJ Enterprises that presumptive intent under R.C. 2745.01(C) does not constitute an “intentional act” and was therefore covered under the employer’s insurance policy.

The Southern District of Ohio agreed with Liberty Mutual on the coverage issue and granted partial summary judgment in its favor. The Southern District distinguished the case before it from Hoyle on the purported basis that Hoyle involved policy language and provisions that were not included in Ivex’s policy. The court then determined that a violation of R.C. 2745.01(C) constituted a “tortious act with the intent to injure another” and, therefore, was excluded from coverage under that specific policy. The Court did, however, determine that Liberty Mutual had a duty to defend Ivex in the underlying tort action because of the legal uncertainty regarding the interpretation of presumptive intent under R.C. 2745.01(C).

The Ivex court, like other federal courts before it, misunderstood or misapplied Ohio law, resulting in inconsistency and unpredictability for policyholders facing potential claims of injury under R.C. 2745.01(C), at least before Ohio federal courts. The decision improperly distinguished Hoyle which considered an analogous policy provision and, in so doing, rendered Ivex’s coverage for employment-related torts completely illusory, a result disfavored under Ohio law. Until the Ohio Supreme Court has an opportunity to conclusively settle this issue, employers should be aware of this uncertainty and mindful that employee claims brought under R.C. 2745.01(C) may result in denial of coverage under certain policy wording, and should work with their insurance broker to ensure that their policies contain the most advantageous policy language.

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Representations and Warranties Insurance in Acquisition Transactions

Elizabeth Schultz-Horbus

In negotiating the terms of an acquisition transaction, parties spend considerable time and legal expense negotiating the language of their representations and warranties in a purchase agreement and the corresponding indemnification and liability sections. Most importantly, the seller makes contractual representations and warranties to the buyer regarding fundamental facts about the seller’s business.

The allocation of risk between the parties for breaches of these representations and warranties and the ability to recover for such breaches are often the most hotly disputed facets of a deal. Buyers want safeguards against post-closing liabilities related to a seller’s breach; sellers would prefer to sleep at night knowing that their obligations with regard to the transaction have come to a definitive end. Structuring an acquisition in conjunction with a representations and warranties insurance policy can accelerate the discussions by eliminating such extensive debates over the related indemnification and liability provisions.

A representations and warranties policy can be purchased in the name of either the buyer or the seller. Buyer-side representations and warranties insurance is more prevalent in M&A transactions. Because this insurance can be used as security or a supplement for the seller’s indemnification obligations under the purchase agreement, or in some cases enables the parties to delete indemnification altogether, representations and warranties insurance is attractive to sellers and is often used in the bidding process or in an auction by a purchaser to enhance its offer to acquire a target company. In some cases, a buyer is able to reduce the escrow or maximum indemnity in a manner so attractive to a seller that the money expended by a buyer on the policy’s premium is counterbalanced by a seller’s willingness to substantially reduce the overall purchase price. Representations and warranties insurance is also attractive to a purchaser because it is first-party insurance and entitles a buyer to direct payment by the insurance company to cover its losses. Another important purpose served by representations and warranties insurance is that it aids in the continuity of business for the surviving company. In many cases, shareholders who served in management of the target company remain employed by the purchaser post-closing. Representations and warranties insurance can eliminate a potentially hostile work environment where the buyer seeks indemnification claims, which often result in litigation, from such management members who are now employees of the buyer.

For a seller, the use of a representations and warranties insurance policy can be an attractive way to structure a business deal. Unlike buyer-side insurance, a seller-side policy is written as third-party coverage in which the insurer provides defense to the seller for claims made by the purchaser for breaches of the seller’s representations and warranties. Possibly the biggest advantage of a representations and warranties insurance policy is that it provides the seller assurance that after closing, he/she will not be saddled with contingent liabilities or a holdback of the purchase price. Therefore, a seller is able to distribute all or most of the proceeds of a transaction to its shareholders. Another scenario in which representations and warranties insurance is attractive to a seller involves the situation in which there are multiple shareholders and the purchase agreement provides for joint and several liability. In such a situation, one shareholder with less knowledge and control over the target company could be responsible for the entire potential risk when his/her interest in the overall consideration paid for the target company is small. A representations and warranties insurance policy can protect such shareholders from this type of unbalanced liability.

However, a representations and warranties insurance policy is not a fit for every transaction and should be evaluated in light of the size of the deal and the potential risks involved. It is important to note that policies do include exclusions, such as knowledge of breach or fraud by the insured, purchase price adjustments, environmental violations known to the insured at closing, and criminal activity. Further, representations and warranties insurance has historically been expensive, although prices have gone down in recent years. Today, a policy is generally priced as a percentage of the policy’s coverage. A one-time premium of 2.0% to 3.5% of the policy limit is common. The insurance also typically carries a deductible which is typically between 1-2% of the purchase price for a transaction.

If a party to a transaction is interested in exploring representations and warranties insurance, it is best to talk with an insurance provider early in the negotiation process. Oftentimes the insurer requires an additional due diligence process (which is conducted at a cost to the parties) before providing a quotation for insurance, so it is best to consider whether insurance is right for the transaction as soon as possible.

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Attorney Highlights

Gabrielle T. Kelly was certified as a specialist in Insurance Coverage Law by the Ohio State Bar Association.

Christopher J. Carney, Keven Drummond Eiber, Amanda M. Leffler, Caroline L. Marks and Paul A. Rose were listed as 2015 Super Lawyers® Ohio Super Lawyer through a peer- and achievement-based review conducted by the research team at Super Lawyers, a service of Thompson Reuters legal division.

Lucas M. Blower, Kerri L. Keller, Alexandra V. Dattilo and Gabrielle T. Kelly were named 2015 Ohio Super Lawyers® Rising Stars™ Ohio Super Lawyer through a peer- and achievement-based review conducted by the research team at Super Lawyers, a service of Thompson Reuters legal division.

Keven Drummond Eiber and Amanda M. Leffler were named in the Top 25: 2015 Women Cleveland Super Lawyers Top List and Top 50: 2015 Women Ohio Super Lawyers Top List.

Lucas M. Blower was elected as a Partner of the firm.

Kerri L. Keller recently hosted a Federal Bar Association webinar on January 14 entitled, The Federal Declaratory Judgment Act: Overview of 28 U.S.C. 2201 and Recent Court Decisions.

Caroline L. Marks & Alexandra V. Dattilo were published in the Insurance Coverage Law Bulletin’s January issue entitled, “The Impact of Bad-Faith Arguments on Forum Battles.”

Keven Drummond Eiber and Paul A. Rose will be speaking at the ABA’s Annual Coverage Conference in Tucson, Arizona.

Kerri L. Keller was elected as Vice Chair of the Victim Assistance Program Board of Directors.

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Why Federal Judges are Dismissing Coverage Claims

Kerri L. Keller

It is a well-known “secret” among insurance coverage firms that policyholders are often better served in state court, rather than federal court. To avoid giving the policyholder any conceivable advantage of appearing in a state forum, insurers will sometimes race to the courthouse and file a declaratory judgment action in federal court under 28 U.S.C. § 2201 (the “Declaratory Judgment Act”).

While this once was a standard and accepted practice, it has come under some scrutiny as some federal judges are exercising their right to dismiss insurance coverage matters that are brought before them.

One of the first notable cases in which this occurred was State Auto Ins. Co. v. Summy. In this Pennsylvania case, the lower court granted the insurer’s motion for summary judgment and held that the policy’s pollution exclusion barred coverage. The insured appealed and argued, in part, that the lower court had improperly assumed jurisdiction under the Declaratory Judgment Act where there was a pending state court lawsuit covering the same issues, even though the state court action had been filed after the insurer filed suit in federal court. The appellate court agreed with the insured and found that the state court was the better forum given that the interpretation of pollution exclusion clauses was an unsettled matter of state law and there were no federal issues or interests at play.

The Summy court discussed the analysis that should apply in determining whether to hear a declaratory judgment case concerning insurance coverage: (1) adhere to a general policy of restraint when the same issues are pending in a state court; (2) consider whether there is an inherent conflict of interest raised when an insurer has a duty to defend in state court while attempting to characterize a suit in federal court as falling within the scope of a policy exclusion; and (3) avoid duplicative litigation. The Summy court likewise noted that federal courts are to apply state law (or predict it where unsettled), but not establish state law. According to the court, “it is counterproductive for a district court to entertain jurisdiction over a declaratory judgment action that implicates unsettled questions of state law... [when such matters] should proceed in normal fashion through the state court system.”

Since Summy, more and more federal courts are declining to exercise jurisdiction over declaratory judgment actions that involve coverage matters. For instance, in Cont’l Ins. Co. v. Hexcel Corp, the insurer filed a declaratory judgment action in the United States District Court for the Northern District of California and sought a ruling that it was under no obligation to defend or indemnify the insured for environmental contamination at its former plant. Shortly thereafter, the insured filed an action for breach of contract against Continental in New Jersey state court and moved to dismiss the insurer’s federal court action. The court agreed with the insured and dismissed the federal court case in favor of the later-filed state court case.

In deciding whether to abstain in favor of the state court action, the Hexcel court considered the same factors that the Summy court considered, but also considered whether abstaining would discourage forum shopping and prevent the district court from needless determination of state law issues. As well, the court looked at the following: (1) whether the federal court action would settle the entire controversy; (2) whether it would serve a useful purpose at clarifying the legal relations at issue; (3) whether declaratory relief was being sought merely as an attempt at procedural fencing and to obtain an unfair advantage; (4) whether the use of declaratory relief would result in entanglement between the federal and state court systems; (5) the convenience of the parties; and (6) the availability and relative convenience of other remedies.

In North Carolina, a similar result was reached in Essex Ins. Co. v. Champion Charters, Inc. In that case, the insurer filed a declaratory judgment action in federal court seeking a declaration that it was not required to indemnify the policyholder for alleged negligence stemming from an explosion on a charter boat. The Champion Charters court dismissed the action without prejudice so that the insurer could seek a declaration in state court. Because the state law was unsettled, the Champion Charters court felt that the issues were better decided by the state court. Likewise, in Nat’l Cas. Co. v. Hertz Equip. Rental Corp., a federal court in New Jersey declined to exercise jurisdiction over an insurer’s declaratory judgment action, reasoning that an insurer’s previously filed action dealt with the same issues, none of which involved federal law.

Such cases are becoming more common, as federal courts around the country are holding that they can and should abstain from ruling on coverage actions that do not present federal issues, or otherwise implicate any of the previously noted factors in such a way as to support litigation in federal court. This is a positive trend for policyholders and one that will hopefully continue.

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Choosing The Battlefield

Paul A. Rose

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Determining Whether Claims for Water Damage are Covered by Property Insurance Policies

Gabrielle T. Kelly

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Decision Points

Sallie Conley Lux

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Attorney Highlights

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Reasons to Start Thinking About Intellectual Property Insurance

Michael G. Craig

Why do you need intellectual property (“IP”) insurance?

IP insurance coverage can be used to protect the insured against third-party infringement claims, allow the insured to pursue potential infringers of their IP, protect the insured against an adverse ruling related to their own IP assets, cover reps and warranties related to IP transactions, and to cover potential contract breaches related to IP assets.

However, more generally, IP insurance is used for your typical business reasons, such as to protect the balance sheet, to provide contractual liability protection, and to facilitate business deals. The cost of IP litigation is almost always higher than any other form of litigation, for example, where the plaintiff is seeking damages of $25 million or less, total litigation costs run $600,000–$2 million for cases settled before going to trial, and $1.2 million–$3.5 million if they go through trial and appeal. For cases involving more than $25 million, the AIPLA says pretrial litigation costs are $1.4 million–$4 million and jump to $2.5 million–$6 million if the cases go through trial and appeal.

The prevalence of non-practicing entities (“NPEs”), patent enforcement entities (“PAEs”) and patent trolls is becoming increasingly problematic. These entities typically don’t practice a patent, but seek to enforce the patent, to which they own enforcement rights, against companies to extract settlements and/or licensing fees. Further, in markets where there are strong competitors, the competition may seek to use their patents to carve out niches, remove competition, or extract royalties. Additionally, when a company enters a new or crowded market, competitors may seek to keep their competition away, or, in a crowded market, numerous patents may already exist. In any case, patent infringement claims against any company can be a significant expense, but may affect the viability of a small or start-up company.

Because the cost of IP litigation can be very costly, enforcing a company’s IP rights against potential infringers may be cost prohibitive. Coupled with an uncertainty in the outcome of any action, companies are often reluctant to move forward with an infringement action. However, small and start-up entities can be easily and adversely affected by IP infringement, and larger companies cannot typically afford to lose their IP rights by failing to protect them, particularly in new or emerging markets. IP insurance may offer a company the ability to enforce their IP rights without too much concern about the cost and potential outcome. For example, where a company innovates in a new or emerging market they need to be able to prevent knock-off artists from stealing their innovations in order to maintain their market share, and, ultimately, the value of the balance sheet.

The IP assets of a company may form a large portion of the value of the company. For example, according to Brand Finance, a brand-valuation consultancy, Google’s trademark – now the most valuable on the planet – is worth an estimated $44 billion, or 27% of the corporation’s overall value, measured by market capitalization.  An adverse ruling, such as a ruling of invalidation, unenforceability, infringement, or other loss of enforcement rights could adversely affect the value of the corporation’s IP assets. Insurance products may help the company protect against any potential loss of IP asset valuation.

When selling, purchasing or being involved in some transaction involving IP assets, insurance can protect against inheriting liability, give the buyer piece of mind, and/or facilitate a transaction involving licensing or selling of the IP assets. Contracts involving reps and warranties, or breach of clauses that involve IP can be a source of added liability to both parties to the contract. Insurance products that limit liability exposure for these situations may facilitate the execution of the contract, deal or transaction.

What policies are available and what do they cover?

General Liability, Content & Media Liability, Errors and Omissions, Business Operators, and Cyber-Risk Liability are forms of common business insurance coverage that may include some form of limited IP coverage for trademarks and copyrights. These types of coverage typically provide defensive coverage and indemnity, but do not typically cover patents, offensive coverage, loss of valuation, or contractual liabilities relating to IP. General Liability products typically cover trademark and copyright infringement associated with advertising or promotion of an insured’s products and service; but coverage may be limited in some industries, such as websites that provide content uploading and sharing, media companies, and some other media and content providers, particularly online. Companies in these areas may require Errors and Omissions coverage, Content & Media Liability, or a Cyber-risk policy.

Standalone IP protection is designed to cover the insured for particular IP related situations. Defensive third-party coverage will typically reimburse the costs associated with defending an infringement suit. Indemnity coverage can be added, to cover any reimbursement damages that may arise from the suit. Offensive first party coverage can reimburse the insured’s costs associated with enforcing their intellectual property rights against an infringer. First party loss of value coverage can reimburse the insured’s lost value of IP assets, which they may incur when a negative ruling is made against the insured. For example, a finding of invalidity may impact the insured’s ability to license and/or keep competitors out of the marketplace. Reps and Warranties coverage can help pay legal expenses and damages associated with a transaction, which typically involves the sale of a business, products, technology or intellectual property. Contractual coverage can help the insured cover legal expenses and damages that may be associated with a license agreement breach or breach of confidentiality.

Eligibility, process and costs.

Standalone IP insurance will not cover situations where the insured knew about the possibility of an action before the policy is in force. Often, defensive coverage has an initial waiting period for responding to claims. Eligibility is related to the type of coverage desired and IP associated with the coverage; previous litigation; the industry sector; amount of IP and how it is being managed; and existing and future licensing and indemnification (vertically).

A broker is typically used to secure coverage, which involves an intensive underwriting process. An initial application is used to filter potential coverage, and a follow-up underwriting process results in the insurer’s decision on coverage and cost, details of which are often negotiated prior to coverage. Cost often ranges from 1 to 10% of coverage; and an underwriter’s fee, retention fee (typically 2%); and co-insurance (5–10%) may also be included.

Other Issues

Companies should also consider other elements when evaluating IP insurance coverage. Some coverage can limit the insured’s ability to select their counsel of choice, and ability to enter into settlements. Further, there are often specific pre-claim analysis requirements, along with detailed ongoing reporting requirements. Often, smaller entities will pool resources together to purchase IP insurance coverage to help spread the significant cost. A recent California ruling stated that, during settlement negotiations, attorneys cannot misrepresent extent of insurance coverage, which is often cited as the most common misrepresentation during negotiations. 

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HIPAA Regulations Expand to Cover Companies Outside the Health Care Industry

Alexandra V. Dattilo

As technology advances and health care providers continue to utilize electronic means of maintaining health records and information, more companies outside the traditional health care field are at risk of violating various federal regulations that previously did not apply. These violations may not be covered by typical commercial general liability (“CGL”) policies.

In March 2013, the Heath Information Technology for Economic and Clinical Health Act (“HITECH”) went into effect, expanding the Health Insurance Portability and Accountability Act of 1986 (“HIPAA”) regulations and broadening the definition of both a business associate and a breach to be more inclusive. Now, any company that is involved in any manner with this protected information, including health information organizations, subcontractors, and vendors are directly liable for breaches. Additionally, a breach now includes any unauthorized acquisition, access, use, or disclosure of protected health information, unless it can be shown that there is a very low likelihood the information has been compromised. Since the enactment of HITECH, there has also been an increase in the enforcement of these regulations and many companies, which may not even realize they are at risk, may be liable for these violations in the event of a data breach.

The costs of cyber data breaches can be crippling and with such breaches on the rise, understanding your insurance coverage and options is critical. This is even more important for the health care sector which makes up over 36% of all data breaches. More importantly, if you believe your CGL policy covers HIPAA and HITECH violations, you may be wrong. There is very little case law addressing whether CGL policies cover HIPAA and HITECH breaches, which have more extensive penalties and requirements than typical cyber data breaches.

Policyholders most frequently seek coverage for cyber data breaches under either the property damage or advertising and personal injury sections of a CGL policy; however, both have limitations. In order for the loss of personal information from a cyber-breach to be covered as property damage, there must be a loss of tangible property, which does not include the loss of protected health information. Unless there is physical damage to a server or other tangible property as a result of the breach, the loss will not be considered covered property damage. Similarly, coverage as advertising and personal injury requires actual oral or written publication of material that violates a person’s right to privacy, which is not always present in this type of data breach. In addition to these limitations, penalties and fines, which can make up a large portion of the damages sustained by a company for HIPAA and HITECH violations, are often excluded from CGL policies.

In one of the few cases specifically addressing HIPAA and HITECH breaches, a California Federal Court found that a hospital was entitled to coverage for two class actions where the allegations included disclosure of personal health information and records on a public website. The Court found that such allegations fell under the personal and advertising coverage part of the CGL policy. However, in a different scenario not involving HIPAA or HITECH violations, a court found that there was no coverage under the personal and advertising clause because there was no evidence that anyone had accessed the stolen information. A court’s determination of coverage under a CGL policy in any cyber-breach depends largely on the specific facts and the court’s interpretation of the policies and those facts.

However, even if the company does have an insurance policy that covers these violations, the costs associated with breaches involving personal health records and information are more expensive than a typical data breach. Companies that have a breach of personal health information or records are subject to extensive legal defense costs, potential class actions, forensic investigation costs, severe penalties of up to $50,000 per violation, and remedial requirements that may be incurred even where no one was harmed or at risk.

In order to protect oneself, a policyholder needs to know its risks and inform its broker. In order to do this, it is imperative that the party responsible for obtaining and maintaining proper coverage knows that the company handles personal health records or information and that it is now at risk for HIPAA and HITECH violations. It is also imperative that a policyholder review the policy to ensure coverage and that the policy limits are high enough to cover a data breach of this nature.

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Coverage for Implied Disparagement Under CGL Policies

Gabrielle T. Kelly

As companies have become more creative with their advertising campaigns and their methods of advertising have become more diverse, there has been much debate regarding whether traditional Commercial General Liability (“CGL”) policies provide coverage for the types of advertising claims for which policyholders are seeking coverage.

Typically, CGL policies provide coverage for liability claims arising out of “personal and advertising injuries.” This generally includes claims against the policyholder that allege “oral, written or electronic publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services.” When a policyholder is sued for making comments that explicitly disparage a competitor or its products, it is almost a foregone conclusion that the CGL will provide coverage for the claims.

However, courts are currently grappling with whether CGL policies provide coverage for claims that do not explicitly disparage an entity; instead, the policyholder indirectly references the entity (ex. a man named Ronald McDonald stating that Burger King is his favorite), or the policyholder greatly brags about its own products (ex. Crest is the best product on the market for proper oral health). Would a lawsuit for publication of these advertisements fall within the “advertising injury” coverage provided by the policyholder’s CGL? Are the statements actually disparagement under the policy language? As the caselaw demonstrates, courts throughout the country are split on whether the policies cover claims for “implied disparagement.”

One federal court ruled that insurers have a duty to defend “implied disparagement” claims when the claimant alleges that it was injured by the policyholder’s false and misleading representations.  The policyholder created and sold an over-the-counter patch containing lidocaine called LidoPatch. The advertisement for LidoPatch stated that it provided “relief that lasts all day without a prescription,” and “same active ingredients as the leading prescription patch.” The claimant alleged that LidoPatch’s similarity to its prescription product, Lidoderm, caused the company injury because consumers would think that Lidoderm was equivalent to LidoPatch.

The court held that falsely claiming superiority over a competitor’s product is disparagement if the product is not, in fact, superior. The court also stated that a statement equating a competitor’s product with an allegedly inferior one is identical to, and no less disparaging than, the policyholder describing its own product as “superior.” Thus, the court found that coverage existed under the “advertising injury” section of the CGL for the suit against the policyholder.

Conversely, a state supreme court recently held that coverage for a disparagement claim is not triggered under the “advertising injury” portion of a CGL policy unless the claimant shows, by express mention or clear implication, that the insured made false or misleading statements that specifically refer to, and derogate, the claimant’s product.  In the case, the claimant sold a cart called “Multi-Cart” and the policyholder sold a cart called “Ulti-Cart.” The policyholder advertised the “Ulti-Cart” as “unique,” “superior,” and “patent-pending,” which the claimant contended that, by implication, the policyholder was suggesting the “Multi-Cart” was inferior.

The Court held that the claims were not covered by the CGL, as implied disparagement is not included within the enumerated coverage grants for an “advertising injury.” The Court ruled that disparagement is a knowingly false or misleading publication that directly disparages another’s business or property and results in damages. Since the policyholder’s statements about its product were mere puffery, the policyholder was not entitled to coverage for the claims.

While only a few courts have dealt with implied disparagement claims, it is likely that additional jurisdictions will be presented with cases, and the debate regarding coverage will continue. As long as “advertising injury” is not expressly limited to coverage for disparagement claims that arise from direct statements about a competitor or its product, there is an argument that the policyholder is entitled to coverage under the plain language of the CGL. Thus, policyholders should contact experienced counsel when seeking coverage under the policy for a potential claim.

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Attorney Highlights

Kerri L. Keller graduated from Leadership Hudson Class of 2014 in May.

Kerri L. Keller was nominated to the Board of Trustees for the Akron Bar Association in June.

Amanda M. Leffler was selected as a member of Class 31 of Leadership Akron in July.

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Considerations When a Policyholder is in Bankruptcy

Amanda M. Leffler, Suzana K. Koch

When an insured files for bankruptcy protection, there are many questions that can arise, especially if there is a claim made during the bankruptcy proceeding. Policyholders are well-served to consider such issues early in the bankruptcy process.

Policies Become the Property of the Bankruptcy Estate

When a company files bankruptcy, the assets become part of a new entity – the bankruptcy estate. An insurance policy is property of the estate, even if the policy has not matured, has no cash value, or is otherwise contingent. The proceeds, however, may not be property of the estate, depending on who is named as the insured. For example, a lender could be an insured, and in that case, the lender would be entitled to the proceeds.

Payment of Premiums

After filing bankruptcy, a company’s assets and liabilities are determined as of the filing date (called the “Petition Date”). The determination of responsibility for premium payments depends largely upon the following considerations:

Did the policy term expire pre-petition but have retrospective premiums due? Failure of the debtor to pay retrospective premiums may not excuse an insurer’s performance. A debtor-insured’s post-petition failure to pay does not void the insurer’s obligations.

Does the policy expire post-petition, but before any plan of reorganization has been filed and confirmed? If so, an insurance policy can be considered an executory contract which a debtor can assume or reject.

Is the policy term still ongoing with standard premium payments due? If the debtor does not pay the premiums, the insurer may be able to cancel the policy.

Deductibles and Self-Insured Retentions

A deductible or self-insured retention (“SIR”) is the amount an insured is responsible to pay under the policy for a covered claim. In a bankruptcy, the inability of the debtor to pay the deductible or SIR does not excuse the insurer from paying claims. Instead, if the insurer has advanced costs that should have been paid by the policyholder, the insurer then has a bankruptcy claim against the insured debtor for that amount.

Bankruptcy courts have found insurers obligated to defend and indemnify to the extent that claims exceed the SIR. Insurers often demand actual payment of the SIR, but if the debtor includes its obligation in its plan of reorganization, bankruptcy courts may consider the SIR to be “satisfied.” Bankruptcy courts have consistently held that the failure of a bankrupt insured to pay an SIR will not excuse the insurer’s performance. Insurers will argue that they have no obligation to perform until the debtor actually pays the SIR, but if a debtor in bankruptcy is incapable of funding an SIR, the inclusion of the SIR amount in a plan of reorganization is enough to trigger the insurer’s obligations.

Some courts, however, have come to a contrary conclusion based upon specific policy language. In Pak-Mor Manufacturing Co., the court concluded that the policy language was “clear as daylight” that none of the insurer’s obligations would arise until the insured paid the SIR. The court reasoned that to require the insurer to cover the claim just because it writes liability insurance generally would be an injustice. The court noted, however, that the best approach is a case-by-case approach in questions regarding whether or not
an SIR must be exhausted
by payment.

In fact, courts in other states have distinguished the Pak-Mor case based on policy language, applicable state laws, and public policy concerns. Courts in Louisiana, Indiana, Illinois, and elsewhere have generally found the public policy concerns to be strong enough to override policy language.

Insured v. Insured

The bankrupt debtor, unless a trustee is appointed, is in possession of the bankruptcy estate. The debtor-in-possession controls the estate’s property, including its legal claims, and it is the debtor-in-possession who has the legal obligation to pursue claims or to settle them. Typical Directors and Officers insurance policies exclude coverage for claims brought by one insured against another, like claims against directors and officers brought by or on behalf of the company.

Courts are split as to the application of the exclusion when claims are brought by a debtor-in-possession, committee of unsecured creditors, or trustee against a bankrupt debtor. Some courts hold that there is a sufficient identity between the pre-petition debtor and the post-petition debtor-in-possession, committee, or trustee that such claims fall within the exclusion. Other courts have disagreed, finding the estate, committee, or trustee (“Non-Insured Entities”) are a separate legal entity distinct from the pre-petition debtor. Additionally, the Non-Insured Entities owe a duty to the creditors of the debtor’s estate, not to the debtor itself, and have been found to be sufficiently adverse to the officer and director defendants that claims do not raise the appearance of collusion that otherwise might arise.

Coverage determinations when an insured has filed for bankruptcy protection are case specific. The intersection of bankruptcy and insurance issues can be complex. If confronted with such issues, contacting experienced counsel is key to understanding how a bankruptcy court might rule on complex coverage issues.

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Discounting Depreciation Defenses

Elizabeth E. Collins, Paul A. Rose

When faced with large claims, insurers occasionally will make creative “depreciation” arguments in an attempt to limit their liabilities. Such arguments are most common in first-party insurance claims, such as claims made under property insurance policies. Policyholders are well served to be wary of them.

First-party insurance claims may be subject to varying valuation approaches, which is the circumstance that gives rise to potential mischief. These varying approaches often will depend upon whether the policyholder repairs or replaces the subject damaged property and the range of valuation options will be established by the policy language, as it is construed under applicable law. Although parties may agree upon the history of a claim and the provisions of the policy that will apply, valuation disputes may still arise. When they arise, the considerations discussed below may be helpful in effectively addressing them.

If a policyholder does not repair or replace damaged property or has not purchased a policy that would cover the full costs to repair or replace, insurers often will be required to pay only a reduced amount determined through application of some depreciation approach. While depreciation arguments may be valid and have proven successful for insurers in many cases, depreciation is not a wild card. Depreciation is not always applicable to property losses and, even when applicable, it may not apply in the manner an insurer contends.

The limits on depreciation reductions typically are clearly defined. For instance, depreciation often is not considered if a policyholder purchases replacement cost coverage and proceeds to replace the damaged property. Similarly, depreciation is not to be applied when the measure of the loss is the cost of repair. As repair costs usually are expenses to be incurred after the loss, this distinguishes them from property values, which often derive from past valuations that have depreciated over time. If such limitations are not evident in the language of the policy, depreciation nonetheless, may be inapplicable if a court finds that an ambiguity exists, which it will resolve in favor of the policyholder.

In Ohio, for example, it is important that insurers not overreach in their depreciation arguments because of Ohio’s insurance contract interpretation rules. Ohio law does not require that a policyholder establish that its interpretation is the only reasonable interpretation or even that its interpretation is more reasonable than its insurers’. Rather, a policyholder will prevail merely if its interpretation is a reasonable interpretation, even if only one among many. Accordingly, any overreaching on the part of an insurer is likely to result in a finding in favor of the policyholder. If the policyholder merely can establish that a provision relating to depreciation is ambiguous – often not a challenging undertaking –and that some reasonable interpretation favors the policyholder, it likely will win the argument.

For instance, in Peterson v. Progressive Corp. (“Peterson”), the Eighth District Court of Appeals rejected an insurer’s attempt to depreciate repair costs, finding that the insurer’s limitations on depreciation were clearly defined in the insurance contract. In Peterson, the court did not permit insurers to deduct depreciation from the cost it incurred to repair a boat to its pre-loss condition. The court reasoned that such depreciation was not specifically provided for in the policy; instead, the insurer elected to repair the boat, which was one of several options available to the insurer under the insurance contract. Thus, the court determined that the cost of depreciation was improperly deducted.

As demonstrated by Peterson and many other cases, courts can be quite wary of insurers’ depreciation arguments. Because courts tend to take the view that the purpose of insurance policies is to make policyholders whole, they generally will apply depreciation deductions to the full extent insurers might wish only if the language of the policies at issue clearly and explicitly permit such outcomes. Accordingly, insurer forbearance from asserting creative depreciation arguments very well may save the insurer and policyholder significant litigation expenses, may save the court system considerable burden, and likely will preserve a fair amount of good will between insurer and policyholder. When a policyholder, its broker or counsel is discussing with insurers resolution of contested “depreciation” claims, these can be very useful points to raise.

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Decision Points

Sallie Conley Lux

Legal decisions interpreting laws, statutes, and insurance policies provide guidance on the meaning of various provisions in insurance policies and whether or not a particular happening may or may not be covered. A few recent legal decision points of note follow:

Mustard v. Owner’s Ins. Co.

The Court of Appeals for Ross County considered whether a liquor liability exclusion was applicable to a not-for-profit policyholder. The plaintiffs were injured in a collision with another driver, who was under the influence of alcohol served by
the local American Legion Post. The plaintiffs filed suit against the other driver, the Post, and others. An agreed judgment was entered against the Post, with the plaintiffs agreeing to satisfy the judgment from the Post’s insurer.

The Post’s insurance policy contained a liquor liability exclusion that excluded coverage where the policyholder is “in the business of” serving or selling alcohol. The Post, a nonprofit entity, argued the exclusion inapplicable because a nonprofit entity could not, by its very nature, be “in the business of” selling alcohol or that, at minimum, the exclusion was ambiguous and should be construed to mean “an underlying profit motive.”

The Court rejected the Post’s argument, determined the language unambiguous, and found the exclusion to apply, holding that the “focus should be on the activities of the insured, rather than its corporate status.” The Court observed that the fact that an entity is organized as a nonprofit does not bear upon whether it engages in pursuing business activities. Here, the Post had a liquor license and sold alcohol for a profit. Accordingly, the Post was “in the business of” selling or serving alcohol, an activity that was excluded from coverage.

Vietzen v. Victoria Automobile Ins. Co.

In this case, the Lorain County Court of Appeals considered whether or not a combined bill, notice of non-payment of premium, and notice of cancellation sent in advance of the premium due date and, thus, in advance of the non-payment itself, is effective to cancel an automobile policy.

A judgment was obtained against the policyholder for injuries resulting from an automobile accident. Victoria Insurance declined to pay the judgment because it claimed to have canceled the policy for non-payment of premium the day that the accident occurred. Approximately two weeks before, Victoria mailed a bill stating that a payment was due the day before the accident happened as well as a “cancellation notice” that if the payment was not received, the policy would cancel for non-payment at 12:01 a.m. the day after payment was due. The payment was not made by the specified due date.

An insurer must comply with R.C. 3937.32 when canceling an automobile policy. The court found the statute ambiguous, and therefore considered the legislative intent, including protecting “insureds from unilaterally being left without the protections . . . by requiring that insurers provide an adequate method of notification when canceling insurance policies.” It further noted that non-payment of premium cannot be grounds for cancellation where the due date for payment has not passed, and that the statute includes a 10-day grace period during which an insured may cure and avoid cancellation. Consequently, an insurer cannot mail a cancellation before the insured has failed to make payment, and the cancellation will not be effective until 10 days after the notice of cancellation is mailed.

Priore v. State Farm Fire & Casualty Co., et al.

Priore was an owner and managing member of an LLC that owned an apartment building. Property and Comprehensive Business Liability insurance was procured, with the LLC as the Named Insured. Ice and snow accumulated on the roof on the apartment building, causing it to fail. Priore sued State Farm for property losses he personally suffered as a consequence of the roof failure under various theories. Of interest here are two.

Priore alleged that the policy should be reformed to include him as a Named Insured under the policy. The bases for this claim were alleged discussions between Priore and the agent that Priore would be covered under the policy. The Court recognized that reformation is an equitable remedy that may be available to alter a written instrument and correct a mistake under certain circumstances. However, an insured has a duty to read the policy; equity only assists the vigilant. Priore never read the insurance policy and thus reformation of the policy was prohibited. The takeaway is, of course, that the insured should always read the policy in order to make relevant inquiries, maximize the ability to recover, and rescind or correct errors in issuance.

Priore also asserted claims against the agent for failure to procure proper coverage to protect his interests, including a failure to recognize Priore’s insurable interests and advise him accordingly. In considering this claim, the Court recognized that an agent has a duty to exercise reasonable care in obtaining the insurance requested by the insured. An agent’s duty does not, however, rise to the level of a fiduciary that, absent a specific request or request for general advice by the insured, includes the higher fiduciary duty to advise the insured about the types of coverage that the insured may need.

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Attorney Highlights

Keven Eiber, Gabrielle Kelly, Caroline Marks, and Paul Rose attended the ABA Insurance Coverage Litigation Committee’s CLE Seminar in Tucson, AZ from March 5-8, 2014.

On March 19, 2014, Amanda Leffler was presented the Ohio State Bar Foundation Community Service Award for Attorneys 40 and Under at the OSBA District 11 annual luncheon meeting.

Amanda Leffler spoke on Indemnification, Insurance and Bonds at the Lorman AIA Contracts Seminar, on April 15, 2014 in Cleveland, OH.

On May 30, 2014, Keven Eiber will be presenting at the CMBA, Insurance Law Section’s seminar, Risk Happens: How Corporate In-House Counsel Can Protect and Maximize Insurance Assets.

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Crime Coverage

Keven Drummond Eiber

Employee theft and fraud is a significant threat to all businesses. Brouse McDowell’s Insurance Recovery Group has seen an increasing number of insurance claims for crime losses in recent years.

Smaller businesses, those with fewer than 100 employees, are particularly vulnerable. Businesses this size tend to take fewer preventative steps and also suffer disproportionally larger median losses.

In its 2012 Report to the Nations on Occupational Fraud & Abuse, the Association of Certified Fraud Examiners reported:

• The average organization loses 5% of its revenues to fraud each year
• The median loss for small businesses was $147,000
• The criminal activity lasted a median of 18 months before detection
• Billing schemes, check tampering and skimming were all very common methods of employee theft from smaller businesses
• Most theft and fraud schemes are discovered by an insider tip, and are discovered only rarely by an outside audit
• 40 to 50 percent of victim companies do not recover any of their losses

Typical first-party property insurance does not cover crime-related losses. Crime insurance fills this gap and provides coverage for losses that are the result of criminal acts committed by employees, such as theft, forgery, extortion, and fraud. A commercial crime policy typically provides several different types of crime coverage, such as: employee dishonesty coverage; forgery or alteration coverage; funds transfer fraud coverage; money and securities coverage; and money orders and counterfeit money coverage.

Crime policies most commonly provide “fidelity” coverage, also called employee theft coverage or employee dishonesty coverage, which insures against employee theft of the insured business’s property and employee theft of client property. The typical policy provides that the insurance company will pay for “the Insured’s direct loss of, or direct loss from damage to, Money Securities and Other Property directly caused by Theft or Forgery committed by an Employee, whether identified or not, acting alone or in collusion with other persons.”

As with any type of insurance policy, the coverage is not all encompassing, but will be limited by the terms, conditions and exclusion in the policy. One of these is that the crime must be committed by an “employee.” An employee may be more narrowly or more broadly defined by the actual policy, which can vary, but one definition is “a natural person while in the regular service of the [insured company] in the ordinary course of such [insured company’s] business, whom such [insured company] compensates by Salary and has the right to govern and direct in the performance of such service, including any part-time or seasonal employee...” Employee typically will not include the owner of a business nor will it include employees of other companies to which certain functions are outsourced, such as payroll functions.

Another nuance to be aware of is that crime policies cover a business when an employee steals from the business itself. If an employee, in the course of his or her employment, steals from someone else, such as a customer, and the business is merely vicariously liable for the customers’ loss, a crime policy likely will not cover that loss. The one exception to this general rule is when the business is “legally liable” for the client or customer’s property. A business’s vicarious liability for its employee’s theft does not make it “legally liable” for the property that was stolen. When used in connection with crime insurance, “legally liable” connotes that the organization has a specific legal duty as to the property, not the employee’s conduct. Generally, this means that the business had actual possession or custody of the client’s property when the theft occurred. This issue often arises when there is theft of property from a customer’s location. The issue also frequently arises when there is theft from the personal bank account of a company officer or executive. When theft of property belonging to anyone other than the business itself is at issue, the policy must be read very carefully.

Finally, the loss must be the result of a crime, which means there was actual theft or fraud which was deliberate or intentional. Crime policies generally do not provide coverage for losses that result from honest mistakes or simple mismanagement. Nor do they provide coverage when the cause of the loss is unknown. Where the only evidence of a loss is an inventory shortfall or accounting discrepancy, generally a crime policy will provide no coverage. However, where there is some evidence, even if it is circumstantial, that the loss is the result of employee crime, inventories and accounting records can and should be used to prove the amount of the loss.

Crime insurance policies are not as standardized as other types of insurance policies, and they may contain many conditions regarding reporting the crime, both to law enforcement authorities and to the insurance company. Importantly, crime policies contain claim deadlines and the time for reporting a claim will begin to run upon “discovery” of the crime.

Although the time to make a claim does not begin to run based merely on unsupported suspicion of employee misconduct, a business easily can find itself up against a deadline before its investigation of such conduct has been completed. The concept of “discover” is that a reasonable person would realize a theft had occurred, even if the exact details are not known. “Discovery” of a loss for insurance purposes occurs when the insured discovers facts showing that dishonest acts occurred and appreciates the significance of those facts.

No business is immune from loss due to employee dishonesty, and the ACFE Report to the Nations on Occupational Fraud & Abuse, which describes the most common types of employee crimes, their detection and prevention, is worth reading. Crime insurance is worth considering as one means of protection if your business does not already purchase it. If your business already does purchase this type of coverage, it is worth carefully reading the policy and discussing its terms and conditions, and the specifics of your business operations, with your broker. By familiarizing yourself with your crime policy, and understanding its terms and conditions, you will be better prepared, in the event your business suffers a crime loss, to maximize your potential recovery.

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Are You the Next Target?

Lucas M. Blower

During the holidays, hackers stole the credit card information of up to 40 million customers of the retail giant, Target. According to Brian Krebs – the blogger who first reported the data-breach – stolen account information is already flooding underground markets.

If the holidays were busy for Target employees managing the public relations fallout, they were even busier for the plaintiffs’ bar. The first class-action complaint was filed against Target within 24 hours after the hack became public. Dozens more followed.

Target is not alone. Hackers have stolen huge amounts of private data from companies as diverse as Wyndham Hotels, Yahoo!, and Sony. In Sony’s case, the thieves acquired the personal information of 77 million subscribers to the PlayStation Network, a popular video gaming service.

The cost of a data-breach can be crippling. According to the Ponemon Institute – a research center studying information security policy – the average cost of a data-breach is $188 per record and $5.4 million total per breach.

With cyber-security breaches on the rise, businesses are looking to their insurers to mitigate their risk. But insurers are reluctant to pay under traditional insurance policies. For example, in Zurich v. Sony, a case pending before a trial court in New York, the insurer is arguing that a commercial general liability (“CGL”) policy does not cover losses resulting from a data-breach. Sony, the policyholder, disagrees. It argues that its CGL policy entitles it to a defense against the dozens of class-action lawsuits that cropped up after it was hacked in the spring of 2011. Policyholders and insurers alike will watch this case for guidance on whether CGL policies provide coverage against hackers.

Whatever the outcome in Zurich, it will bear only on an older, more traditional form of insurance. There are, however, newer policies that expressly protect against cyber threats. This cyber insurance goes by various names – such as Information Security Insurance or Data Breach Insurance – and the precise coverage varies across the policies. Generally, though, cyber insurance protects against the following risks:

• Data Breach
• Regulatory Investigation
• Misappropriation of Intellectual Property
• Transmission of Malicious Code
• Data Recovery
• Business Interruption
• Extortion

If your company collects sensitive data, you may want to purchase one of the various cyber policies. Work with your insurance broker to identify which policy is right for you. Your business will then be prepared if it is the hackers’ next target.

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Coverage Conversations

Gabrielle T. Kelly

Q: I was sued, so I retained defense counsel and resolved the lawsuit. I think my insurance would have covered the claim. Is it too late to provide notice and receive reimbursement from the insurance company?

A: Although an insurance policy may require prompt notice, the specific facts of a case determine whether notice was given in a reasonable time or notice was so untimely as to bar coverage. Even if it is determined that the policyholder’s notice was late, most courts consider whether the insurance company was actually prejudiced by the late notice before finding coverage has been forfeited. A majority of courts place the burden on the insurance company to prove that the insured’s notice was late and that it prejudiced the company. Other courts, including Ohio, have taken the approach that late notice gives rise to a presumption of prejudice to the insurance company, and the insured has the burden of proving that the insurance company was not prejudiced. There are only a few courts that have ruled that late notice alone relieves the insurance company of its obligation to pay.

Therefore, if you believe that you had a covered claim or you are unsure about a claim and have not yet informed your insurance company, consider taking the following steps:

• Don’t assume that you are foreclosed from obtaining coverage because notice was not provided as soon as you learned of the lawsuit.
• Review the notice provisions in your policies carefully to determine the required timing and manner of notice.
• Send written correspondence to your insurance company notifying them of the claim and all policies that may potentially provide coverage.
• Gather documents regarding the nature of the lawsuit in case the insurance company requests additional information to evaluate the claim.
• Gather documents that explain the investigation process and litigation strategy that defense counsel used in handling the lawsuit.

Because jurisdictions handle late notice differently, consider contacting experienced coverage counsel to determine the applicable law and the best method for pursuing reimbursement.

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Coverage for Consequential Damages Caused by Construction Defects: Westfield Insurance Co. vs. Custom Agri Sys., Inc. – One Year Later

Amanda M. Leffler, Laura E. Kogan

Until recently, Ohio courts were split as to whether an insured’s defective or faulty workmanship on a construction project would constitute an “occurrence” under a typical commercial general liability policy (“CGL”). Recently, the Ohio Supreme Court weighed in on the issue, holding that these types of claims “are not claims for ‘property damage’ caused by an ‘occurrence’ under a [CGL] policy.” See Westfield Ins. Co. v. Custom Agri Sys., Inc., 2012-Ohio-4712 (“Custom Agri”). Despite the broad wording of the Court’s holding, the decision cannot be read to prohibit all claims in which defective construction is alleged.

Custom Agri’s Narrow Scope. Most commentators agree that the Ohio Supreme Court adopted the rule that construction defects are “occurrences” within the meaning of CGL policies, but only if property other than the policyholder’s own work is damaged. Thus, the Court’s opinion was consistent with prior Ohio decisions which had universally treated claims alleging such “consequential damages” as alleging an “occurrence.” Some commentators and insurers, however, have asserted that the Court left open the question of whether consequential damages can satisfy the occurrence requirement.

Ohio Appellate Treatment of Custom Agri. A little more than a year after the Ohio Supreme Court’s decision in Custom Agri, only one Ohio appellate court has provided any further guidance. In a recent case in the Tenth District, a subcontractor was hired to remove and reinstall air conditioning units, among other things. The subcontractor negligently reinstalled the units, damaging the units but causing no damage to other property. Relying upon Custom Agri, the appellate court identified the relevant question as “whether the claim in this case involves defective construction or workmanship.” Notwithstanding this broadly-phrased question, the court was careful to point out that the only damage at hand was to property within the subcontractor’s contractual scope of work. Thus, as was the case in Custom Agri, the faulty work at hand did not cause damage to property other than the policyholder’s own work.

On the Horizon. The battle regarding coverage for construction defects continues nationwide. Custom Agri and similar cases have been criticized by other state’s high courts as the minority position that finds no support in the specific language of the policy. Conversely, the Sixth Circuit Court of Appeals recently held that defective construction does not constitute an occurrence under Kentucky law. Most notably, that court also found no occurrence where the policyholder caused damage to the property of others that the policyholder was hired to “control.” Such a distinction is inconsistent with prior Ohio decisions, of course, but perhaps illustrates the type of arguments Ohio policyholders can expect to face from their insurers when they make claims for construction defects.

Protect Yourself. Damages arising from construction defects can be significant, and many contractors still expect them to be covered by CGL policies.

Policyholders should consider retaining experienced coverage counsel to assist in the claim process.

Policyholders can protect themselves by doing the following:

• Owners or general contractors should consider requiring a performance bond from downstream contractors in an amount that will protect them if there is defective workmanship.
• In the event of a claim, the policyholder should recognize that not all defective construction claims are barred, and carefully analyze whether the defective workmanship caused damage to property other than the policyholder’s own work.
• The policyholder should analyze the potential applicability of any policy exclusions.

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Attorney Highlights

HONORS and APPOINTMENTS

Four Brouse McDowell Insurance Recovery attorneys have been designated as Certified Specialists in Insurance Law by the Ohio State Bar Association. Only 14 lawyers received this certification designation state-wide. Brouse McDowell’s Certified Insurance Law Specialists are Paul A. Rose, Keven Drummond Eiber, Amanda M. Leffler, and Caroline L. Marks.

Caroline L. Marks has been appointed to the Ohio State Bar Association Insurance Coverage Specialty Board.

Amanda M. Leffler was recently named as Co-Chair of the firm’s Litigation Practice Group. Amanda will share responsibilities of managing the firm’s litigation practice, including its insurance recovery practice, with Keven Drummond Eiber.

Brouse McDowell has been included in the 2014 “Best Law Firms” rankings published in U.S. News and World Report. The firm received the highest possible, Metropolitan Tier 1, ranking in Akron for Insurance Law, as well as several other practice areas. The firm also received Metropolitan Tier 1 rankings in Cleveland for Corporate Law.

Five Brouse McDowell Insurance Coverage attorneys have been selected as 2014 Ohio Super Lawyers® and Rising Stars. Brouse Insurance Coverage attorneys listed in the 2014 Edition of Super Lawyers® are, Keven Drummond Eiber, Amanda M. Leffler, and Paul A. Rose. 2014 Rising Stars from Brouse’s Insurance Recovery Practice Group are Kerri L. Keller, and Caroline L. Marks. Twenty-three Brouse attorneys were selected for these honors across all practice areas. Super Lawyers,® published by Law and Politics Media, Inc., represents only 5% of Ohio attorneys while Rising Stars represents less than 2.5% of attorneys under 40, or who have been practicing law ten years or less.

COMMUNITY INVOLVEMENT

Kerri L. Keller was recently elected Vice President of the Board of Directors for the Victim Assistance Program of Summit County.

Amanda M. Leffler recently joined the Board of Directors for United Disability Services.

ARTICLES

Paul A. Rose and Caroline L. Marks co-authored the article, “Ohio Supreme Court Case May Impact Significantly Coverage Case Settlements,” published in the February 2014 issue of the Cleveland Metropolitan Bar Association Journal, Vol. 6, No.7.

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Settling with Your Primary Insurer Could Be a Multi-million Dollar Mistake

Caroline L. Marks

Federal and state courts in Ohio are currently divided as to whether a policyholder, by virtue of settling with its primary insurer, loses its right to select from among triggered policies to receive payment, with the resulting effect being the forfeiture of excess coverage. Recently, the Ohio Supreme Court has accepted a case which is likely to settle this split of authority. Lincoln Elec. Co. v. Travelers Cas. & Sur. Co., No. 2013-1088.

While the issue is complex, it is of paramount importance to understand, because no one wants to be the policyholder who settles with its primary insurer, only to later find out that its excess coverage has been reduced or even eliminated as a result of the settlement.

How the Issue Arises

Assume that a policyholder has CGL coverage from 2006 to 2010. As is typical, it has primary insurance with relatively low limits – $5 million per year – and overlying excess coverage with much greater limits that attach above the $5 million level. Recently, the policyholder has been sued in a high-stakes case seeking many millions in damages over a claim that spans multiple years. As a result of the dispute over coverage, the policyholder settles the underlying case, incurring $20 million in defense and indemnity costs. Thereafter, the primary insurer, which has certain unique coverage defenses available to it, offers to settle the coverage dispute for $4 million. A prompt settlement is attractive to the policyholder, but it will leave the policyholder with significant unreimbursed costs, which it would like to collect from its excess insurers.

Should the Policyholder Settle?

The answer to this question depends on a variety of considerations, but a policyholder needs to understand how settling with its primary insurer for less than the total limits of the primary coverage potentially could reduce or eliminate available excess coverage. This question implicates four cornerstones of the Ohio coverage law system:

Trigger

Under Ohio’s continuous-trigger law, all policies from 2006-2010 are eligible to respond to the underlying claim, because they represent those policies in effect when the alleged continuing bodily injury or property damage took place.

Allocation

Because Ohio has adopted the “all sums” allocation approach, the policyholder is allowed to select the policies from which to receive payment on the claim.

Drop Down Liability

If the full amount of underlying coverage is not available for any reason, the attachment point of the overlying coverage is preserved, and the overlying coverage is not required to “drop down” to pay claims below the bargained-for level.

Contribution

If an insurer is selected by the policyholder and pays a claim on an “all sums” basis, that insurer has certain equitable rights of contribution against other triggered insurers.

The Policyholder’s Perspective:

Here, the policyholder has $16 million in unreimbursed costs – $20 million minus the $4 million settlement. Under “all sums,” the policyholder selects the 2010 policy year, because that year has the most available coverage. As a result, the policyholder should expect to receive $15 million from its excess insurers:

• $4 million (paid by primary insurer)
• $1 million (paid by policyholder)
• $15 million (paid by excess insurers)
• $20 million (total costs)

Applying vertical exhaustion, the umbrella and excess policies will pay $10 million and $5 million respectively. The policyholder will absorb $1 million, which represents the variance between the settlement amount and the full limit of the primary policy, because Ohio law generally does not require excess policies to “drop down.”

The Insurers’ Perspective:

Everything is the same, except that the insurers assert that by settling with the primary insurer, which had five years of triggered coverage, the policyholder forfeited its right to use “all sums” allocation. According to the insurers, the policyholder now must exhaust the limits of all triggered primary policies before reaching the excess layers. Under this scenario, the policyholder will receive nothing from its excess insurers:

• $4 million (paid by primary insurer)
• $16 million (paid by policyholder)
• $0 million (paid by excess insurers)
• $20 million (total costs)

This unfair result should occur, certain insurers would argue, because the combined limits of the triggered primary policies ($25 million) exceed the total costs of the underlying claims. Insurers have had some success with this argument in some jurisdictions, notwithstanding the fact that it creates a strong disincentive to settle, undermines judicial economy, and fails to make a policyholder whole, all in contravention of long-standing Ohio public policy.

Knowledge Is Power.

When faced with the question of whether to settle with a primary insurer, a policyholder would be well-advised to:

Recognize that settling with its primary insurer potentially could reduce or eliminate available excess coverage.

Understand that although Ohio law appears clear, it is not completely settled and that not all states take the same approach. “Choice of law,” referring to which state’s law will apply to a given dispute, can be critical.

Fully analyze the situation and the potential ramifications of any decision before settling with any insurer, including considering the policy language, the magnitude of the claims, and the financial impact of those claims on the policyholder.

Doing these things at the earliest opportunity will give the policyholder important information needed to make an informed decision on the question of whether to risk forfeiting excess coverage by settling with a primary insurer.

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Litigation Preservation Obligations

Kerri L. Keller

When a policyholder has been sued, and has provided notice of that claim to its insurer, the policyholder should keep in mind the potential for a coverage dispute when preserving relevant documents related to the litigation. If an insurer has either denied coverage for the claim, or is defending under a reservation of rights, the possibility of a coverage lawsuit arises, triggering preservation obligations for the policyholder.

Document Retention Plan

Most businesses have a document retention plan to provide for the review, retention, and destruction of documents created or received in the ordinary course of business. Document retention plans enable businesses to comply with their retention requirements and preserve necessary documents, while ensuring that they are not retaining useless documents.

Litigation Hold

At times, businesses must stop the routine destruction of documents and implement a “litigation hold.” A litigation hold is the mechanism used to suspend a document retention plan and notify employees of preservation obligations. Typically, a litigation hold must be issued when a business knows, or reasonably should know, that a suit is about to be filed against it, when it plans to file a lawsuit, when a suit is actually filed, when a discovery request has been made, or when a court issues a discovery order. It can arise before a complaint is actually filed, such as when a demand letter is sent. If a business fails to issue a litigation hold, the consequences can be severe.

Ramifications of Failing to Preserve

Spoliation occurs when documents are destroyed or not preserved. Penalties can include the cost of recreating the information, an adverse instruction at trial, the exclusion of favorable testimony, a judgment against the spoliating party, monetary sanctions, and even criminal sanctions.

Who Should Be Notified?

Recipients of a litigation hold notice are those who are likely to have relevant information. While this will typically result in the notice being distributed to employees, a litigation hold notice can extend to third-party agents, such as independent contractors, vendors, suppliers, and brokers, as Rule 34 of the Federal Rules requires that a party to litigation produce documents that are within that party’s “possession, custody, or control.” Courts interpret the term “control” to extend to all documents that a business has the right, authority, or ability to obtain. Accordingly, a business may be required to extend its litigation hold to include documents that are in the physical possession of a third-party, such as an insurance broker or agent. To determine whether a party has the ability to “control” documents that are in the possession of a third-party, courts will look at the contract between the business and its third-party agent. In other words, if the contract between the business and its third-party agent allows for inspection of the documents upon demand, the business will likely be deemed to have “control” over the documents and may have to extend the litigation hold accordingly.

The Bottom Line

With regard to document preservation, savvy businesses know they need to preserve documents related to litigation. If a coverage dispute is likely, a policyholder should also issue appropriate litigation hold letters to all custodians of insurance-related documents, including those who have custody of the historical, underwriting,

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Frack-Quakes: Will Your Policy Provide Coverage for Injection-Well Earthquakes?

Matthew K. Grashoff

New Research Links Fracking to Seismic Events

The rapid growth of hydrofracturing, better known as “fracking,” in Ohio has produced aftershocks throughout numerous industries and communities. Some of these aftershocks have been more literal than others, however. Recent scientific studies indicate that fracking companies’ use of injection wells, the underground wells used to dispose of wastewater produced in the fracking process, is connected to the occurrence of earthquakes in areas that had not previously experienced any seismic activity. For example, the city of Youngstown, Ohio, which had not experienced an earthquake since record-keeping began in 1776, experienced more than 100 seismic events in the year following the opening of the nearby Northstar 1 injection well in December 2010. These events culminated in a magnitude 4.0 earthquake on December 31, 2011.

While the New Year’s Eve earthquake produced only a few reports of minor property damage, property owners may not be so lucky in the future. In Oklahoma, on November 5, 2011, a magnitude 5.7 injection-well earthquake injured two people, destroyed 14 homes, and was felt in 17 states. If a major injection-well earthquake struck Ohio, would your insurance cover the damage? While no cases have addressed the issue to date, the answer may end up echoing the old adage: it depends—you have to read the language of your policy.

Potentially Applicable Policy Language

Most all-risk, first-party insurance policies, such as a typical homeowner’s policy, deal with earthquakes under an “earth movement” exclusion. Earth movement exclusions usually provide that the insurer is not liable for damage caused by or attributable to earthquakes, landslides, mud flows, or other forms of earth shifting, sinking, or rising. As at least one federal district court opinion explains, earth movement exclusions are designed to protect the insurer from major, unpredictable disasters that cannot be insured against without specialty coverage. Insurers might argue that such a rationale would seem to cut against coverage for an injection-well earthquake: though insurers can more readily anticipate where injection-well earthquakes may strike, the earthquakes themselves are still difficult to predict with certainty.

Policyholders, however, have had success defeating earth movement exclusions by arguing that the language of the exclusion is ambiguous. Courts ranging from the Pennsylvania, Alaska, West Virginia, and Florida Supreme Courts to the Third Circuit and various federal district courts have held that where an earth movement exclusion could reasonably be read to apply to only “natural” earth movements, rather than to any earth movements, the exclusion must be narrowly interpreted in favor of the insured. These cases involved fact patterns relating to subsiding mines, burst pipes leading to mudslides or erosion of a building’s foundation, nearby excavations leading to earth shifting, and other activities where the causation of the earth movement was clearly “man-made.” The evidence surrounding injection-well earthquakes suggests that they should likewise be considered “man-made” and, accordingly, losses arising from these events would not be barred by the earth movement exclusion.

It does not appear any Ohio courts have yet analyzed the ambiguity, or lack thereof, of an earth movement exclusion. However, in the context of analogous water damage exclusions, the First, Fourth, and Twelfth Appellate Districts have refused to find any ambiguities regarding natural or man-made causation.

In one 2005 case, the Eighth Appellate District found in favor of the policyholder, denying application of an earth movement exclusion where the damage was caused by “lateral earth [and] hydrostatic pressure” which caused a wall to collapse. The court held that the policyholder was entitled to coverage because none of the eight specifically listed types of “earth movement” were lateral earth or hydrostatic pressure. It is possible that this reasoning could be used in an injection-well earthquake case by arguing that an injection-well earthquake is not really an “earthquake” at all, and thus is not covered by the specifically enumerated types of earth movement.

In the absence of guidance from Ohio courts, policyholders are advised to carefully read their insurance policies’ earth movement exclusions. For those policyholders who wish to avoid the uncertainty, the Mayor of Youngstown, the Honorable Charles P. Sammarone, may have other advice: two days after the New Year’s Eve earthquake in his city, he purchased earthquake insurance.

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Attorney Highlights

HONORS and APPOINTMENTS

David Schweighoefer joined the firm as a partner in our Health Care Practice Group, while partner Irv Sugerman has joined the firm’s Litigation Practice Group.

Elizabeth Collins, Matthew Grashoff, and Andrew Moses recently joined Brouse McDowell as new associates in the Litigation Practice Group.

Chair of Brouse McDowell’s Labor and Employment Group, Chris Carney was recently appointed Partner-in-Charge of the firm’s Cleveland Office.

Eleven Brouse attorneys were selected by their peers for inclusion in The Best Lawyers in America© 2014: Christopher Carney, Keven Drummond Eiber, Daniel Glessner, Richard Harris, David Hunter, Christopher Huryn, David Lum, Marc Merklin, Paul Rose, Michael Sweeney, and Thomas Ubbing. (Copyright 2013 by Woodward/White, Inc., of Aiken, S.C.)

Twenty-five Brouse attorneys were included in the 2013 Edition of American Lawyer Media and Cleveland’s Legal Leaders.

COMMUNITY INVOLVEMENT

Kerri Keller is a member of Leadership Hudson’s 2013-2014 Class. Leadership Hudson is a nine-month program that introduces participants to Hudson city, business, and community leaders.

Amanda Leffler was recently elected as a member of the Board of Directors of the Battered Women’s Shelter of Summit and Medina Counties.

Keven Drummond Eiber, Sallie Lux, Caroline Marks, and Gabrielle Kelly attended the American Bar Association, Insurance Coverage Litigation Committee’s Women in Insurance Networking Conference in October.

In September, Amanda Leffler joined 60 Akron leaders for the Greater Akron Chamber of Commerce’s Inter-City Leadership Visit in Omaha, Nebraska.

ARTICLES

Kerri Keller’s article, ERISA Plan Fiduciaries, How to Avoid ERISA Retirement Plan Liability, was published in the October issue of Smart Business Akron/Canton.

Stephen Bond’s article, Final Rules for Wellness Programs, was published in the September-October issue of Akron/Canton MD News and, Exempt or Nonexempt? How Wage and Overtime Exemption Laws Affect Your Business, was published in the July issue of Smart Business Akron/Canton.

PRESENTATIONS

Litigation Group Chair Keven Drummond Eiber recently spoke at the Cleveland Metropolitan Bar Association’s Continuing Legal Education Program, Ohio Insurance Law Unmasked: Scary Coverage Concepts, on the topic of Crime Policies.

Partner Stephen Bond recently served as a panelist at Crain’s Health Care Summit where he discussed, Reform 101: Changes Your Business Must Make Now and Before the Next Wave Hits.

Brouse McDowell Insurance Coverage Practice Group attorneys Lucas Blower, Keven Drummond Eiber, Amanda Leffler, Meagan Moore, and Paul Rose recently presented, Essential Tools for Brokers and Their Clients, a continuing legal education and insurance continuing education program for local insurance agents and brokers.

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The Uninsurable Risk

Paul A. Rose

Louis Brandeis served with great distinction on the United States Supreme Court for 23 years. Toward the end of his tenure, in 1935, he said of information, “Lack of recent information ... is responsible for more mistakes of judgment than erroneous reasoning.” He made that observation in a work entitled, The Curse of Bigness, in which he addressed the dangers of corporations becoming too big–a moment of prescience that foreshadowed the calamity that AIG became more than seven decades later.

For acuity of insight, however, he may just as well have been addressing the perpetual plight of policyholders, one that is as problematic today as it ever has been-their information deficit. In every coverage dispute, the policyholder dauntingly faces a claim fight against an adversary that wrote the policy language, evaluates claims as an integral part of its extensive business enterprise, and retains legions of lawyers to provide counsel on claim matters-in other words, an adversary that has a pronounced information advantage. Further, none but a select few policyholders can match the financial resources, appropriately referred to as the “war chest,” available to insurance companies to fund extensive, protracted coverage litigation.

Ironically, then, one risk policyholders cannot insure against is the risk of having their claims-including their valid claims-denied by insurers that have both a financial interest in denying claims and a much more refined sense than any policyholder ever will of whether the claims actually are covered. Although policyholders cannot insure against this risk, they can protect against it by closing the information gap. It is toward this end that Brouse McDowell is publishing this quarterly newsletter.

We have counseled policyholders and their brokers extensively for nearly 30 years. Our experience over this period has demonstrated that insurance claims, particularly large insurance claims, are denied with some frequency without evident or appropriate regard by insurers for their merit. We have prosecuted a great many denied claims, which insurers asserted were not covered, with a very high success rate, obtaining recoveries for policyholders ranging from the hundreds of thousands to the hundreds of millions of dollars.

In attempting to fulfill the purpose of this newsletter, which is to close the information gap for the benefit of policyholders and their brokers, we will explore various issues on which the insurance industry, in effect, has waged misinformation or selective-information campaigns.

When claims are denied, policyholders often accept denials, sometimes uncritically, sometimes begrudgingly. At times, of course, denials are appropriate. Too often, however, when denials are inappropriate, passive acceptances by policyholders reflect the types of “mistakes of judgment” Justice Brandeis warned can arise from “lack of recent information.” This publication will provide recent information that policyholders and brokers alike will find useful to protect against an uninsurable risk-the risk that a more knowledgeable insurance industry, pursuing its own profit-and-loss interests, will deny claims the insurers know, but they hope policyholders will not know, should be paid. It is our sincere hope that you find it useful.

A small sampling of the common misconceptions we will address are the following:

• The myth that an insurer can reserve rights to deny a claim yet still select defense counsel and control the defense.
• The myth that punitive damages cannot be covered in Ohio as a matter of law.
• The myth that a policyholder, to prevail on a coverage dispute, must establish that its understanding of the policy language is in some sense more reasonable than the insurer’s professed understanding.
• The myth that policyholders cannot recover their attorneys’ fees and costs when they successfully litigate against their insurers.

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Assuring Adequate Coverage: An Insurance Broker’s Role

Caroline L. Marks

When seeking to procure insurance for yourself or your business, an experienced and knowledgeable insurance broker can be an invaluable member of your team. It is, however, important to understand the differing roles played by the broker and the policyholder in the procurement of insurance. Failing to recognize the parties’ respective obligations can result in the policyholder having inadequate insurance or, even worse, no insurance coverage for a particular peril or liability.

Remembering these few points can help prevent that situation:

• Although this point is obvious, the policyholder knows itself and its business better than the broker. Consequently, a policyholder needs to communicate comprehensive and accurate information about the risks to be insured to the broker.
• The onus is principally on the policyholder to determine the amount and types of insurance which may be necessary, even though the broker is there to assist the policyholder in this endeavor. Under Ohio law, a broker typically has no duty to advise the client about the amount or type of insurance needed. Instead, the broker has a duty to exercise good faith and reasonable diligence in obtaining the insurance requested by the client. Additionally, if the broker knows that the client is relying upon his or her expertise, then the broker owes a further duty to exercise reasonable care in advising the client. Nonetheless, the policyholder must accept an active role in making these determinations and, for complex situations, may want to obtain the advice of coverage counsel.
• Finally, a policyholder MUST read the insurance policy promptly after receiving it. Are all of the relevant people, companies, property, activities, and locations included within the ambit of the policy? Are the limits adequate? Is the deductible or self-insured retention too high? Is anything excluded from coverage which the policyholder wants or needs to be covered? Simply put, the first time a policyholder examines its insurance policy should not be after an incident. Under Ohio law, a policyholder has a duty to examine the policy, know the extent of its coverage, and notify the broker if the coverage is inadequate.
• Ultimately, the policyholder should take an active role in procuring coverage for itself or its business. In doing so, the policyholder should use the broker’s expertise and resources to its best advantage.

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Profile: Keven Drummond Eiber

Keven Drummond Eiber

Keven Drummond Eiber is an experienced litigation attorney with a practice focused primarily in the area of insurance recovery – litigating insurance coverage disputes for business clients, negotiating insurance recoveries and advising clients on insurance coverage issues in the context of both claims and policy acquisition and renewal.

During her more than 20 years at Brouse McDowell, Keven has handled a wide range of coverage issues involving long-tail general liability claims for latent injuries and property damage, catastrophic property losses, professional liability claims, directors and officers liability claims, intellectual property, privacy and cyber law claims, and complex business interruption claims.

Keven is active in professional organizations, and is a frequent speaker and writer on insurance law topics. Among other things, she currently chairs the Insurance Law Section of the Cleveland Metropolitan Bar Association.

Keven joined Brouse McDowell in 1989 and became a partner of the firm in 1994, and has been active in firm management, chairing the Environmental Practice Group for a number of years, and currently chairing the firm’s Litigation Practice Group.

Keven is AV® Preeminent™ Peer Review Rated through Martindale-Hubbell. She has been named an Ohio Super Lawyer through a peer and achievement-based review conducted by the research team at Super Lawyers, a service of Thompson Reuters legal division from 2004-2010. Keven was also selected as a Best Lawyer in America® from 2008-2013 through a peer-review survey.

Keven lives in Cleveland, Ohio, and rides her bike to work. She is married and has two sons, one who is working toward a Ph.D. in biomedical engineering in Sydney, Australia, and one who is working on his B.S. in Engineering at SUNY Maritime College. Keven is certified by U.S. Sailing as a race management official, and when she is not advocating on behalf of her clients, can be found on Lake Erie and elsewhere, running sailboat races or racing sailboats herself.

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Q and A Section - Coverage Conversations

Keven Drummond Eiber

Q: After I was sued, my insurer agreed to defend me, but in its letter, it listed reasons why my claim might not be covered and it says I have to pay back the defense costs later if the claim is not covered. Do I have to do that, and should I respond?

A: Some courts have held that an insurer may not obtain reimbursement of defense costs absent an express provision to that effect in the insurance policy. Other courts have determined that an insurer can have no right of reimbursement absent express consent, or an express, bilateral agreement with the policyholder that creates such a right, either in the language of the policy itself or by a separate, express agreement. Still other courts have held that an insurer can recoup defense costs if the insurer has asserted its right to recoupment, or reimbursement, in a properly worded reservation of rights letter, after which the insured has accepted the defense offered by the insurer. Even then, in order to be entitled to such reimbursement, the insurer must timely and explicitly reserve its right to recoup the costs and it must provide its policyholder with specific and adequate notice of the possibility of reimbursement. Ohio courts have not settled the question.

When presented with a reservation of rights letter, especially one that asserts a right of reimbursement:

• Always promptly respond in writing.
• Read the reservation of rights letter carefully and independently evaluate the coverage defenses that are expressed in the letter.
• Confirm the statements that you agree with, but always expressly disagree with the aspects you do not agree with.
• Always reject any attempt by an insurer to assert a right of recoupment or reimbursement of defense costs and indemnity costs absent a specific policy provision that requires it.
• Always reject any attempt by the insurer to paraphrase, re-word, recast or explain policy language.
• Reserve your own rights to pursue coverage in turn.
• The law varies greatly from jurisdiction to jurisdiction, and the law of the jurisdiction where the underlying lawsuit is pending may not be the correct law to apply. Don’t rely solely upon your insurance broker’s advice concerning coverage defenses asserted by the insurer. Consider retaining independent coverage counsel to evaluate your coverage rights.

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Insurance Coverage Practice Group Description

Insurance coverage issues, particularly those arising in complex commercial claims, are among the most challenging in the law. Brouse has been at the forefront of these legal developments for more than 25 years. The firm’s insurance coverage clients include both U.S. and foreign businesses in many industries and of all sizes, from closely held corporations to Fortune 100 Companies. For these clients, we have obtained recoveries ranging from hundreds of thousands to the hundreds of millions of dollars. Our lawyers also have taken the lead in critical amicus efforts in both federal and state courts to develop and protect the law for the benefit of policyholders.

Brouse lawyers also are versatile. They are experienced at working with clients to devise claim and litigation approaches appropriate for claims of all types, ranging from modest disputes to bet-the-company cases.

In many instances, the firm has been able to assist clients in obtaining insurance recoveries without resorting to litigation. When necessary, Brouse has litigated coverage cases to conclusion, including litigating such cases through the highest appellate levels. In short, we can assist clients in interpreting and evaluating insurance policy provisions, formulating sound coverage positions, and implementing effective coverage litigation strategies. The breadth and depth of our experience in this area, and our long record of success, place us among the leading policyholder coverage firms in the country.

The firm has experience with the following types of claims, among others:

• Environmental claims
• Asbestos claims
• Lead paint claims
• Mold claims
• Silica claims
• Intellectual property claims
• Directors and officers liability claims
• Crime coverage claims
• Product liability claims
• Construction defect claims
• Builder’s risk claims
• Property claims for losses from fire and other catastrophic events
• Hurricane claims
• Employment practices liability claims
• Workers’ compensation claims
• Professional services claims
• Securities claims
• Aircraft claims

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Attorneys Highlights

Paul Rose was named as Akron’s Best Insurance Lawyer.

Keven Eiber and Paul Rose were listed in the Insurance Law Section of The Best Lawyers® In America.

Keven Eiber was named chair of the Cleveland Metropolitan Bar Association Insurance Law Section for 2013-2014.

The following coverage lawyers were named as Ohio Super Lawyers in 2013: Chris Carney, Keven Eiber, and Paul Rose. The following coverage lawyers were named as Rising Stars in 2013: Lucas Blower, Nick Capotosto, Kerri Keller, Amanda Leffler, and Caroline Marks.

Amanda Leffler was named a 2013 Northeast Ohio Top 25 Under 35 Mover and Shaker by the Cleveland Professional 20/30 Club.

Kerri Keller chaired the annual Akron Bar Association Federal Court Luncheon, which was attended by numerous federal judges and their staff.

In March, Lucas Blower, Keven Eiber, Amanda Leffler, and Caroline Marks attended the American Bar Association, Section of Litigation, Insurance Coverage Litigation Committee’s Annual Meeting and CLE program in Tucson, Arizona.

Kerri Keller presented “Technology Gone Wild: How the Increased Use of Technology Has Affected the Practice of Law in Summit County” at the Akron Bar Association’s 2013 Federal Bench Bar Conference in March.

On April 19, Paul Rose, presented “Reservation of Rights and Recoupment of Defense Costs” to the Cleveland Metropolitan Bar Association.

Lucas Blower and Amanda Leffler co-authored “Recent Developments Affecting Professionals’, Officers’, and Directors’ Liability,” Tort Trial & Insurance Practice Law Journal, Spring 2013.

In May, Kerri Keller presented “Understanding Document Retention Plans and Litigation Holds” for Lorman Education Services.

On May 22, Gabrielle Kelly presented “How to Gain a New Perspective of Pre-Trial Practice” at the Bad Faith Insurance Claims in Ohio seminar hosted by NBI.

In June, Keven Eiber presented “Tri-Partite Relationship – The Great Debate” at the Akron Bar Association’s 2013 Advanced Issues in Insurance Coverage. Amanda Leffler was the course planner for the program, and Caroline Marks presented “Excess and Umbrella Coverage Issues.”

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