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Archive for the ‘Insurance Coverage and Extra-Contractual Liability’ Category

Consent-to-Settle Clauses Under Review in Massachusetts

Posted on: September 30th, 2019

By: David Slocum

Earlier this month, the Massachusetts Supreme Judicial Court (the SJC), the state’s highest court, heard oral argument in a case which presents the question whether consent-to-settle clauses typical to most professional malpractice insurance policies should be deemed unenforceable as against public policy.

The case, Rawan v. Continental Casualty Co., places before the SJC an important issue of first impression in Massachusetts, the outcome of which will have significant implications for professional liability insurers and their insureds throughout the state.

The case arises out of an underlying engineering malpractice lawsuit in which plaintiff homeowners alleged the defendant professional engineer negligently designed their home.  The engineer was insured by Continental Casualty Co. (CNA) under a professional liability policy, which contained a standard consent-to-settle clause providing: “We [CNA] will not settle any claim without the informed consent of the first Named Insured.”

Consistent with its insured’s wishes, CNA made no settlement offer during the underlying engineering malpractice litigation.  At trial, the jury found the engineer was negligent and awarded $400,000 in damages.

Thereafter, in a separate follow-on lawsuit against CNA, the plaintiff homeowners alleged CNA had violated Massachusetts’ unfair settlement practices statute, Chapter 176D §3(9)(f), which requires insurers to effectuate a prompt, fair and equitable settlement when an insured’s liability has become reasonably clear.  Plaintiffs alleged CNA had failed to properly investigate and settle the plaintiffs’ claims against the engineer during the underlying litigation.

CNA moved for, and was granted, summary judgment in its favor on the grounds that its insured had not consented to settlement of the claims.  Thus, CNA argues, it was contractually bound under the consent-to-settle clause of the policy not to effectuate a settlement of the plaintiffs’ claims against the insured, irrespective of whether the insured’s liability had become reasonably clear.

In asking the SJC to overturn the trial court’s grant of summary judgment in CNA’s favor, the plaintiffs argue that such consent-to-settle clauses undermine the purpose of Chapter 176D by ceding settlement authority to insureds who potentially may unreasonably refuse to settle valid claims against them.  Plaintiffs contend that such clauses therefore should be deemed unenforceable as against public policy in Massachusetts.

CNA and a number of bar and professional associations, which have filed amicus briefs in its support, argue the grant of summary judgment in CNA’s favor should be affirmed because consent-to-settle clauses in noncompulsory professional liability insurance policies are compatible with insurers’ obligations under Chapter 176D.  They contend Chapter 176D’s purpose of preventing insurance company overreach is not implicated in such situations, and a professional insured’s important reputational interest also supports the enforceability of consent-to-settle clauses.

The SJC is expected to issue its decision in this important and closely-watched case later this term.

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


More Money Can Mean More Problems: The Evolution of Coverage for Cryptocurrency

Posted on: September 20th, 2019

By: Danny Walsh and Isis Miranda

Businesses, governments, and non-profits across the globe are implementing projects that leverage blockchain, a digital ledger technology, to improve their operations.

Cryptocurrency is one of the more controversial uses of blockchain technology. Although Bitcoin is the most dominant cryptocurrency, there are approximately 2,600 cryptocurrencies valuing over $260 billion. As cryptocurrencies become widely accessible through mobile applications combined with increased self-regulation, including voluntary leverage caps, the current trend toward acceptance by governments will continue.

As with early insurance claims arising in the world of cyber, traditional forms of cover are being updated to reflect the scope of coverage, and altogether new forms are in the works.

Coverage for cryptocurrency under traditional insurance policies may depend on how the term is defined. An Ohio court relied on an Internal Revenue Service (IRS) definition in holding that the insured’s stolen Bitcoin valued at $16,000 was “property” under his insurance policy. Kimmelman v. Wayne Ins. Grp., No. 18 CV 1041 (Ct. Com. Pl. Sep. 25, 2018). IRS Notice 2014-21 states as follows: “For federal tax purposes, virtual currency is treated as property” and is therefore subject to capital gains taxes. Accordingly, when the insured in Kimmelman submitted his claim for stolen Bitcoin, the insurer concluded that Bitcoin constituted “money” under the policy and, therefore, was subject to the policy’s $200 sublimit. In the subsequent coverage litigation, the trial court rejected the insurer’s argument that the stolen Bitcoin constituted “money” and denied the insurer’s motion for judgment on the pleadings. The court, however, did not address the policy’s definition of “property,” which may have limited coverage to loss of “tangible property.”

Federal courts have consistently held that Bitcoin is “money or funds” under federal law governing money transmission. A Florida appellate court also held that selling Bitcoin constitutes “money transmission” for purposes of the state’s money transmission law. State v. Espinoza, 264 So.3d 1055 (Fla. Dist. Ct. App. 2019). Defendant Espinoza was charged with money laundering and engaging in the business of a money transmitter without a license. He sold Bitcoin to an undercover agent of the Miami Beach Police Department after the agent said he planned to use the Bitcoin for illicit purposes. The trial court dismissed the charges against Espinoza, but the appellate court overturned the dismissal. The appellate court conceded that Bitcoin is not “currency,” but based its ruling on the fact that it has “monetary value” since it can be exchanged for currency.

The issue of whether crypto assets, including cryptocurrencies and digital tokens, constitute securities subject to regulation is still in flux. The Securities and Exchange Commission (SEC) has taken the position that cryptocurrencies, such as Bitcoin, are not “securities” because they are designed to operate like currency. On the other hand, the SEC has stated that other cryptocurrencies that act as digital tokens do constitute securities and that initial coin offerings (ICO’s), which involve digital tokens, are subject to securities regulations.

In the insurance context, a significant issue is whether cryptocurrency or digital tokens are viewed as “money,” “property,” “securities,” or some other term. Currently, some policies expressly include or exclude coverage for cryptocurrencies. For example, crime and fidelity ISO forms can have either a broad virtual currency exclusion or an “Include Virtual Currency as Money” endorsement, which revises the definition of “money” to include virtual currency.

We will be following the development of crypto cover policy forms as the use, acceptance, and regulation of cryptocurrencies emerge and evolve in the years to come.

If you have any questions or would like more information, please contact Danny Walsh at [email protected] or Isis Miranda at [email protected].

Investors’ Life Insurance ‘Gamble’ Busts out in NJ Courts

Posted on: September 19th, 2019

By: Justin Boron

To take out insurance, you almost always need an “an insurable interest” in the risk being insured, such as a financial interest in a home or a car.  It’s what prevents strangers to the risk from betting on the occurrence of a casualty, like your neighbor taking out a policy on your house or car in the hopes that either is destroyed in an accident.  The requirement takes on heightened importance in the area of life insurance where it prevents strangers to the insured life from betting on someone’s death and discourages worse things, like foul play.

But because life insurance is treated as a transferrable asset—much like a home or car—investors developed a workaround for the “insurable interest” requirement.  In arrangements referred to as stranger-oriented life insurance policies—STOLIs, for short—investors fund the premiums for a life insurance policy purchased by the insured who has the insurable interest when the policy is purchased but who intends to re-sell it at a discount to investors without an insurable interest.  The insured’s frequent practical purpose is to pay for immediate health care needs or other expenses.  The investors’ purpose is to make a profit off the benefit when it is paid.  Usually, that means that their profit increases the sooner the insured dies.  STOLIs, of course, are controversial.  But despite efforts to regulate them, they continue to evolve in one form or another.

Considering New Jersey law, the Third Circuit Court of Appeals recently confronted whether a STOLI involving a $5 million benefit could be upheld under the states’ public policy.  Based on certified questions answered by the New Jersey Supreme Court, it concluded that the life insurance policy was void ab initioSun Life Assurance Co. v. Wells Fargo Bank NA, Nos. 16-4337, 16-4387, 2019 U.S. App. LEXIS 24916, at *5-6 (3d Cir. Aug. 21, 2019).  It reasoned that the STOLI arrangement was intended to benefit the investors whose interest was in the early death of the insured rather than anyone whose interest was in the continued life of the insured.  As a result, it was not an insurance policy; it was a gamble on a person’s life.

In so holding, the Third Circuit and the New Jersey Supreme Court joined at least 30 other states prohibiting or regulating STOLIs, so its decision is not particularly remarkable on its own.  But it illustrates how determined investors are to bet on the duration of a person’s life when there is a financial incentive and how common the STOLI arrangements might be.  Absent a large benefit, they probably go unchallenged.

In fact, there have been multiple recent cases that either voided such policies or precipitated legislative change to the “insurable interest” requirement.   See, e.g., Wells Fargo Bank, N.A. v. Pruco Life Ins. Co., 200 So. 3d 1202 (Fla. 2016); Lincoln Nat’l Life Ins. Co. v. Gordon R.A. Fishman Irrevocable Life Tr., 638 F. Supp. 2d 1170 (C.D. Cal. 2009); Sun Life Assurance Co. v. Conestoga Tr. Servs., LLC, 263 F. Supp. 3d 695, 702 (E.D. Tenn. 2017).

Although the New Jersey ruling places it in line with other states’ position on the issue, the Third Circuit decided to refund the policyholder the premiums paid to the insurer.  As a result, the ruling might not discourage the practice completely, and it certainly will persist in other states where there is no anti-STOLI legislation.

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

The Complications of Sub-limits in High Exposure Cases

Posted on: August 16th, 2019

By: Phil Savrin

Insurance coverage is essentially the transfer of risks to insurers who have pooled assets through payment of premium to cover liabilities that may arise to the insureds. As the exposures rise in value, the cost of coverage rises to meet the demands of the insurance industry.  Over the years, certain exposures have become increasingly difficult to cover, such as liabilities arising from asbestos, artificial stucco, and so-called junk faxes under the Telephone Consumer Practices Act of 1991. A single lawsuit involving these types of claims can easily exhaust the policy limit in addition to incurring significant costs of the defense.

To remain competitive while also keeping premiums affordable, some insurers offer to cover these types of claims but with a cap on the exposure through a sub-limit.  So, for example, a CGL policy that covers a bodily injury exposure up to $1,000,000 “per occurrence” might provide a reduced limit of $50,000 for a particular exposure such as a claim that involves sexual molestation or abuse. To further control the exposure, the sub-limit often includes defense costs, which could wholly eliminate the sub-limit in a case of significance.

Having a sub-limit can give the insurer an “edge” in resolving high-exposure claims where the proceeds of the policy is essentially the only recoverable asset of the insured. Even where the insured is financially solvent, a sub-limit can protect the insurer from paying more than the amount that went into the calculation of the premium. On the other hand, a sub-limit can create complications when the claimant is unwilling to accept the lower amount of coverage, or when the claimant (and/or the insured) contends that the claim does not fall entirely within the endorsement containing the sub-limit.  Once the defense costs consume the amount, the insurers may then need to determine whether to withdraw from the defense based on the exhaustion of the applicable limit or to continue to defend and consider bringing a declaratory judgment action.

This scenario can present a dilemma for the insurer; withdrawing from the defense could result in an extra-contractual claim, while continuing to defend adds unintended costs especially if a coverage action ensues. These costs may be warranted in light of the exposure presented yet incurring them over and above the sub-limit cuts against the reason for having the sub-limit in the first place.  Similarly, claimants and insureds may incur additional legal costs in litigating the applicability of the sub-limit and add uncertainty to the resolution of the claim.

In sum, although sub-limits help contain costs in high-exposure cases, careful consideration must be given to their enforcement which can present special challenges to claimants, insurers, and insureds alike.

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

Could Facebook’s $5 Billion FTC Fine for Privacy Violations be Covered by Cyber Insurance?

Posted on: August 14th, 2019

By: Isis Miranda

A similar question was posed to me recently at a conference where I was speaking about the GDPR (European General Data Protection Regulation): “Could my company just buy insurance instead of worrying about whether our China-based venders are complying with the GDPR?” The audience chuckled. But the question raises important and complex issues, one of which is whether civil fines are insurable and, more importantly, whether they should be.

Record-breaking fines recently announced by the FTC (Federal Trade Commission), including $5 billion against Facebook and up to $700 million against Equifax, and proposed fines by the ICO (the UK’s Information Commissioner’s Office), including £183 million against British Airways and £99 million against Marriott, combined with the advent on the horizon of the CCPA (California Consumer Privacy Act), a sweeping GDPR-like privacy law, has increased anxiety over the insurability of these fines.

Traditional insurance policies generally do not cover regulatory fines, but many cyber policies do. These insuring provisions, which typically provide coverage for civil fines and penalties levied by any regulator worldwide arising from a data breach “where insurable by law,” have yet to be scrutinized by a court. Uncertainty over whether courts may void these policy provisions as being contrary to public policy prompted the Global Federation of Insurance Associations to request assistance from the OECD (Organisation for Economic Co-operation and Development), explaining that “there is international confusion as to the insurability of fines and penalties” and stating that “OECD work to clarify this issue would benefit consumer and insurer contract certainty.”

Answering this question is no easy task. Starting with the question of whether these fines are insurable, one immediately finds that there are no legislative pronouncements or court decisions addressing the issue in the context of a cyber policy that expressly provides coverage for regulatory fines. And efforts to predict how a court might rule once the issue is raised, as it inevitably will be, are stymied by the disarray of the current case law in the related areas of punitive and statutory damages. This diversity of opinion reflects the complexity of the underlying question – whether such fines should be insurable. Courts struggle with questions, such as who should decide – legislators, judges, insurance companies? And what criteria should be applied in making the decision? Should the decision apply to all civil fines and penalties issued pursuant to a given regulation or should the issue be decided on a case-by-case basis for each violation?

In the U.S. the decisions of courts across the country regarding the insurability of punitive damages are, well, all over the map. These decisions vary in their approach to reconciling the language of the insurance policy at issue with public policy considerations in the approximately 20 states that prohibit insurance for directly assessed punitive damages, including decisions that:

  1. prohibit insurance for punitive damages, even if the policy expressly provides coverage;
  2. prohibit insurance for punitive damages, unless the policy expressly provides coverage;
  3. do not prohibit insurance for punitive damages but do not interpret policies as covering them, unless expressly included; and
  4. do not prohibit insurance for punitive damages and interpret policies as covering them, unless expressly excluded.

It is unclear whether courts will address coverage for fines and penalties in similar fashion. States that do not prohibit punitive damages could, nonetheless, place restrictions on insurance for civil fines and penalties beyond existing limits on insuring intentional conduct. And vice versa. Thus far, a few courts have applied the prohibition on punitive damages to civil fines and penalties without addressing the distinctions between the two. For example, in City of Fort Pierre v. United Fire and Casualty Company, 463 N.W.2d 845 (S.D. 1990), the federal government sued the City of Fort Pierre seeking civil penalties due to violations of the Clean Water Act of 1977. The South Dakota Supreme Court held that the civil penalties were punitive in nature and thus precluded from being covered under the City’s insurance policy. A dissenting justice disagreed, stating: “Before punitive damages may be awarded, malice on the part of the party from whom the punitive damages are sought must be shown. No similar requirement exists for the imposition of the civil penalty. Therefore, the civil penalty the United States sought to have imposed upon the City of Ft. Pierre cannot be equated to punitive damages.” Similarly, in Bullock v. Maryland Casualty Company, 85 Cal. App. 4th 1435 (Ct. App. 2001), the California Court of Appeal held that civil fines are not insurable without addressing the fact that the public policy prohibiting insurance for punitive damages was expressly limited to punitive damages that were assessed upon a finding of fraud, oppression or malice. City Products Corporation v. Globe Indemnity Company, 88 Cal. App. 3d 31 (Ct. App. 1979). It will be interesting to watch how the case law evolves as coverage battles involving cyber policies that expressly provide coverage for fines and penalties percolate through the courts.

Now to the question we started with. Without knowing the contents of Facebook’s insurance policy, we can only speculate as to its terms, including which state’s laws would apply to interpret the policy. But we would not be going out on a limb by saying that the $5 billion FTC fine likely exceeds policy limits. Facebook will not garner much sympathy, given that it inarguably violated the FTC’s 2012 order and can readily afford the $5 billion fine. And there is concern that allowing companies to obtain insurance to cover civil penalties for violating data privacy and security statues would discourage them from making the investments necessary for compliance. But the reality is more nuanced. Small- and medium-sized businesses, in particular, benefit from the data security assessments, cyber risk consulting services, and preferred vendors that are made available by many cyber insurance carriers, which serves to increase compliance with related statutes. See, e.g., Kyle D. Logue & Omri Ben-Shahar, “Outsourcing Regulation: How Insurance Reduces Moral Hazard” (Coase-Sandor Institute for Law & Economics Working Paper No. 593, 2012). These issues will, no doubt, continue to be debated for many years to come.

Amidst all this uncertainty, one thing is sure: the future will be fascinating.

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