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Archive for the ‘Insurance Coverage/Bad Faith’ Category

Court Holds that Eleven Claims are Subject to Single Limit

Posted on: October 13th, 2017

By: Joyce M. Mocek

Recently, the Eleventh Circuit, applying Florida law, held that eleven claims of bodily injury by separate patients all against a pharmacy and pharmacist for negligence in repackaging a drug for injections constituted “related claims” under the insurance policy(ies) at issue.  Amer. Cas. Co. of Reading, Pa. v. Belcher, No. 17-10848, 2017 WL 4276057 (11th Cir. Sept. 27, 2017)

In this case, a pharmacy and pharmacist allegedly repackaged drugs from larger vials into single dose syringes for injections into eyes of patients, but did not take the necessary steps to prevent contamination.  The syringes allegedly became contaminated, and eleven patients that were injected with the drugs suffered severe vision loss and/or blindness.   Both the pharmacist and pharmacy tendered the eleven claims to their professional liability carrier- which were separate errors and omissions policies issued by the same insurer, each policy with a $1 million per claim and $3 million aggregate limit of liability.

The insurers defended the claims presented against the pharmacy and pharmacist subject to a reservation of rights and asserted that the claims were “related claims,” subject to the $1 million per claim limit.  The trial court held that the claims were logically connected and thus “related claims.”   

The Eleventh Circuit affirmed the trial court, holding that the test to determine whether the claims were related was whether they were logically or causally connected by any common fact or circumstance.   In this case, the Court found that the claims were logically connected because a single technician supervised by the same pharmacist prepared each syringe using the same process at the same location, violating the same health and safety regulations.

If you would like to know more about this decision or other insurance coverage matters, please contact Joyce Mocek at [email protected]


Computer System Fraud and Funds Transfer Fraud Coverages Extended to “Spoofing”

Posted on: September 8th, 2017

By: Richard E. Wirick


Computer theft insurance takes many forms. Under traditional commercial criminal theft products, coverage only applies if there is a “fraudulent (a) entry into…a Computer; [and] (b) a change to Data elements or program logic of a Computer System.”

Let’s take two examples of claims, one covered and one proving problematic. In the first scenario, a third party hacker hacks into an insured’s computer system, causing it to transfer the funds from the insured’s account into the hacker’s bank account. In the second scenario, a hacker “spoofs” the same result. That is, he emails the insured, fraudulently misrepresenting that he is one of the insured’s clients, and urges the insured to make a transfer to an offshore lender. Note that “spoofing” works because it tricks the insured’s email server into recognizing the fraudulent email as one that originated from the insured client or an agent of the insured’s client.

While coverage has often been found for scenario one, recognizing that the hacker had in fact gained access to and hence “used the [insured’s] computer to…fraudulently cause a transfer from inside [the insured’s premises] to an… outside person,” the second scenario has proven more difficult for policyholders to argue for coverage because it is typically not recognized as the “use of a computer” to “cause a transfer” of money from within an insured’s premises to an outside destination. “To interpret the computer -fraud provision as reaching any fraudulent scheme in which [a computer] communication was part of the process would convert [that] provision into one for general fraud.” Apache Corp. v. Great American Ins. Co., 662 F. App’x. 252, 258 (5th Cir. 2016); see also Taylor & Lieberman v. Fed. Ins. Co., 681 F. App’x 627, 629 (9th Cir. 2017).

Recently, the U.S. District Court for the Southern District of New York issued an opinion that will be argued by policyholders seeking coverage for scenario two. Medidata Sols., Inc. v. Fed. Ins. Co. No. CV-00907, 2017 U.S. Dist. LEXIS 122210 (S.D.N.Y. July 21, 2017). Medidata’s accounting department received a phony email, purportedly from the company’s president, stating that an attorney would be contacting them.  Although the email contained the president’s correct email address on the “from” line (and his picture), it was a “spoof.”  After a phone call and a second email by the hacker to accounting and high level executives, Medidata wired $4.7 million to an offshore bank, and into the hacker’s hands.

The insurer argued no coverage under the Computer Fraud Coverage in the “Crime Coverage Section” of an “Executive Protection” policy because there was no “fraudulent entry of Data into [a] computer system,” because the information instructing the transfer went to an “inbox…open to…any member of the public.” The Medidata court disagreed. It held that the president’s address in the “from” line constituted “data”, entered by the hacker, posing as the company’s president. This satisfied the requirements that the third party “entered the insured’s computer system and “used” it to effectuate a fraudulent transfer.”

On the Funds Transfer Fraud Coverage of the “Crime Coverage Section”  the issue was whether the transfer was “without Medidata’s knowledge or consent.”  The Court held that the fact that the accounts payable employee willingly pressed the “send” icon does not transform the bank wire into a valid transaction. Since the validity of the wire transfer depended upon several high level employees’ knowledge and consent which was only obtained by “larceny by trick.”

The decision can be expected to be appealed by the insurer.   The Medidata decision extension of the concept of “use” or “violation” in computer fraud coverage parts to the ever-increasing practice of “spoofing” is a novel interpretation of the coverage that was at issue and an area that we anticipate will continue to be reviewed by the courts.   

If you have any questions or would like more information, please contact Rick Wirick at [email protected], or John Moura at [email protected].

Adverse Coverage Ruling Has a Silver Lining

Posted on: August 28th, 2017

By: William H. Buechner, Jr.

535990119[1]The Georgia Court of Appeals recently ruled for the first time that an insurer may not rely on coverage defenses set forth in a reservation of rights that was sent before the insurer later disclaimed coverage. The Court also held that the insurer waived a counterclaim for rescission by denying coverage after learning of alleged misrepresentations by the insured in the application, by treating the policy as valid with respect to other claims in other cases, and by waiting approximately six months before asserting rescission as a counterclaim. American Safety Indemnity Co. v. Sto Corp., 2017 Ga. App. LEXIS 339 (June 30, 2017). In a silver lining for the insurer, however, the Court held that the insurer could not be held liable for bad faith pursuant to O.C.G.A. § 33-4-6 because the issue as to whether reservation of rights letters are still effective after the insurer later denies coverage had never been squarely addressed by Georgia courts and because there was some evidence in the record that could have led the insurer to believe that the reservation of rights letters had been sent to the insured.

In light of the Sto ruling, insurers issuing Georgia policies cannot rely on coverage defenses contained in a reservation of rights letter if it subsequently disclaims coverage. If the insurer initially disclaims coverage but changes its mind and decides to defend the insured under a reservation of rights, it must send the reservation of rights letter to the insured before it undertakes the defense of the insured. The insurer’s failure to do so may result in waiver of all coverage defenses. Finally, if an insurer concludes that the insured made material misrepresentations in the application for insurance, the insurer must promptly inform the insured of its intent to rescind the policy as void and then actually treat the policy as void. Sending a disclaimer letter or handling other claims under the policy as if the policy still exists may constitute a waiver of any rescission claim the insurer may have.

On the bright side, Sto provides some reassurance that Georgia courts will reject bad faith claims under § 33-4-6 where the denial of coverage is based on a legal issue of first impression or where the insurer otherwise has a reasonable legal or factual basis for denying coverage.

If you have any questions or would like more information, please contact William H. Buechner, Jr. at [email protected].


Making Wise Choices-of-Law

Posted on: August 24th, 2017

By: Michael Kouskoutis

_main_soda[1]Recently, insurers for Coca-Cola denied coverage on a claim presented under a political risk policy, after a blockade prevented the beverage giant from importing supplies required for soft-drink production. The blockade was the result of political tumult in Nepal, when the Madhesi—an ethnic minority—blocked the India-Nepal border in protest of Nepal’s newly adopted constitution.

Coca-Cola filed suit against its insurers in a Georgia federal court, alleging breach of implied duty of good faith and fair dealing, seeking a declaratory judgment, $1 million in losses, bad faith and attorneys’ fees. The insurers recently moved to dismiss the suit, arguing that despite the policy’s New York choice-of-law provision, Georgia common law should apply because there exists no pertinent New York statute regarding good faith claims or attorneys’ fees. This argument is rooted in a rule recently discussed by the Georgia Supreme Court, that in the absence of a foreign statute on point, “at least with respect to a state where the common law is in force, a Georgia court will apply the common law as expounded by the courts of Georgia.” Coon v. Med. Ctr., Inc., 797 S.E.2d 828, 834, 300 Ga. 722, 729 (2017).

Further, the insurers urge that either way, neither New York nor Georgia common law permit such claims under these circumstances. Moreover, they argue that “breaching the duty of good faith and fair dealing supports only a breach of contract claim and does not provide the basis for a separate cause of action.”

These arguments add yet another layer of complexity over issues surrounding choice-of-law provisions, and insurers should keep in mind that the law chosen to govern a policy may not necessarily be the law that will govern. We will continue to keep insurers apprised of developments in this area as they occur.

If you have any questions or would like more information, please contact Michael Kouskoutis at [email protected].

Write Like You Mean It

Posted on: August 21st, 2017

By: Melina Shahbazian

1The First Appellate District of the California Court of Appeal in Duarte v Pacific Specialty Insurance Company (2017) 13 Cal.App.4th 45, recently sent this message to an insurance carrier who attempted to rescind an insurance policy due to a material misrepresentation. In Duarte, the owner of rental property applied for a landlord insurance policy with Pacific Specialty Insurance Company by filling out an electronic application, and Pacific issued a policy the same day. Few months later, a tenant filed a lawsuit against Duarte alleging habitability defects, and Duarte tendered to Pacific. Pacific denied coverage and then sought to rescind the policy based on material misrepresentation on the application. Duarte filed a motion for summary judgment on his claim for declaratory relief and argued that he was entitled to a ruling that Pacific owed him a duty to defend the tenant lawsuit. Pacific filed a motion for summary judgment and argued that it was entitled to rescind the policy.

At issue were Question No. 4 and Question No. 9 of the insurance application. Question No. 4 asked Duarte “Has damage remained unrepaired from previous claim and/or pending claims, and/or known or potential (a) defects, (b) claim disputes, (c) property disputes, and/or (d) lawsuit?”, and Question No. 9 asked Duarte “Is there any type of business conducted on the premises?”. Duarte answered no to both questions.

The Court of Appeal reviewed the grant of the motion for summary judgments de novo, and held that Duarte reasonably interpreted Question No. 4 to be asking whether there were previous or pending insurance claims, and Question No. 9 to be asking whether there was regular and ongoing business activity on the premises, to which he answered “no”. The Court further held that Pacific could not rescind the policy based on misrepresentation because the questions contained “garble syntax” and were utterly ambiguous, and the insured’s interpretation of those questions were reasonable.

While the Court of Appeal held that ambiguous application questions precluded summary judgment on the insurer’s claim that they were entitled to rescission, the Court did affirm that the procedure used by the insurer was supportable and that an insurer may seek rescission by asserting rescission as an affirmative defense to its insured’s lawsuit and to do so the insurer is not required to file a cross-complaint for rescission.

If you have any questions or would like more information, please contact Melina Shahbazian at [email protected].