On October 12, 2016, the United States Court of Appeals for the Seventh Circuit, in an opinion authored by Judge Richard Posner, affirmed a district court decision finding that securities intermediary U.S. Bank, N.A. is entitled to $6 million in life insurance policy proceeds, plus statutory interest and bad faith damages, from insurer Sun Life Assurance Company of Canada. In its decision in the case, Sun Life Assurance Co. of Canada v. U.S. Bank National Association, as Securities Intermediary, the Seventh Circuit made clear that, pursuant to applicable Wisconsin statutory law, an insurance company cannot avoid its obligation to pay the death benefit on a life insurance policy, even if the policy was issued to a stranger lacking an insurable interest in the insured life. And if it fails to timely pay a claim on such a policy, a carrier may be held liable for statutory interest and additional damages for acting in bad faith. The ruling applies to policies governed by Wisconsin law that were issued prior to November 1, 2010, when the Wisconsin legislature amended the applicable law.
The insurance policy in this case was issued in 2007 by Sun Life on the life of wealthy octogenarian Charles Margolin. In 2011, U.S. Bank purchased the policy on behalf of an investor (i.e., as securities intermediary), and in 2014, Mr. Margolin died. Even though Sun Life had collected $2.5 million in premiums and knew about all of the transactions concerning the policy that occurred between 2007 and 2014, it refused to pay the policy proceeds without first investigating the policy’s validity. U.S. Bank, as the owner and beneficiary of the policy, invoked a Wisconsin statute requiring the insurer to pay claims within 30 days and brought a lawsuit against Sun Life to force a payment.
In a major victory for policyholders, the New York Court of Appeals held on May 3, 2016 that manufacturers Viking Pump, Inc. and Warren Pumps, LLC are entitled to coverage under excess insurance policies for liability resulting from asbestos claims, and that the manufacturers are not required to exhaust the available primary policies before accessing the excess coverage. This far-reaching ruling reaffirms the Court’s prior holdings that policy language is controlling in coverage disputes.
Your company’s controller receives an email instruction from your CEO to wire funds to complete a time-sensitive and confidential deal–seems like a clear directive to execute, but it’s not. It’s an increasingly common scam known as the “Business E-mail Compromise” (BEC).
In a BEC scam, as we previously described, fraudsters send spoofed e-mail to trick employees into making unauthorized transfers of funds, generally through wire transfers. The employee, usually a controller or other individual responsible for wiring money, receives an e-mail which appears to be from a high-level company executive, company lawyer or advisor, or even a trusted long-standing supplier or vendor. The e-mail pressures the employee to transfer company funds to a bank account, often offshore, urgently and secretly. The scammers may attempt to add credibility by sending the targeted employee spoofed e-mails from multiple trusted accounts or by plying the employee with fraudulent telephone calls, websites, and documents on formal letterhead. As discussed by our White Collar defense colleagues, victims of the BEC scam have reported to the FBI and international law enforcement agencies over $1.2 billion in exposed losses, much of which occurred in 2015 alone. While being victimized by a BEC scam can be costly, some of these losses may be covered by insurance.
So much depends on a single word! Recently, a New York federal court refused to construe an employer’s liability exclusion in a CGL policy to bar coverage for a bodily injury suit brought by the employee of an insured parent company against a subsidiary insured under the same policy as the parent. Considering both the language and purpose of the exclusion, this was the right outcome. But it might have come out the other way if one three-letter word in the policy had been different.
In Hastings Development, LLC v. Evanston Insurance Co., the insured subsidiary sought coverage under its CGL policy for a suit brought against it by an employee of its parent company (which also was insured under the policy), after the employee was injured while operating a mixing machine owned by the subsidiary in a building the subsidiary also owned. The employee alleged that the subsidiary was both negligent and reckless in operating the mixing machine. Initially, the employee also alleged that his employer, the parent company, was vicariously liable for the subsidiary’s alleged negligence, but later dismissed the claim against his employer after receiving workers compensation benefits.
Evanston, the plaintiff’s CGL insurer, denied coverage based on an employer’s liability exclusion in the policy. The exclusion provided that there was no coverage for any suit arising out of bodily injury to “an employee of the Named Insured arising out of and in the course of employment by any Insured, or while performing duties related to the conduct of the Insured’s business.” (Emphasis added). The insurer moved to dismiss on the basis of this exclusion, and the plaintiff cross-moved for summary judgment. The insurer argued that the exclusion applied because the underlying claimant was an employee of a Named Insured under the policy. The plaintiff-policyholder argued that the exclusion did not apply because the underlying claimant was not its employee (but rather an employee of its parent company) and the exclusion only bars coverage for suits by an employee against his or her own employer.
Applying New York law, the court determined that both parties’ interpretations of the exclusion were reasonable. The court reasoned that the phrase “an employee of the Named Insured” in the exclusion “could conceivably encompass employees of any of the Named Insureds . . . or be limited only to the Named Insured who employed the injured employee.” The court relied on a prior case in which a court held that a similarly-worded exclusion did not bar a suit brought against a general contractor by an employee of a subcontractor, reasoning that the purpose of an employer’s liability exclusion is to bar coverage when workers’ compensation coverage otherwise applies–which it doesn’t in a suit against an entity other than the injured employee’s employer. The court distinguished another case that involved a similar exclusion but referred to “any insured,” rather than “the Named Insured.” On the other hand, the court noted, the exclusion defined “employee” to refer to employees of “any Named Insured” – i.e., the definition of “employee” in the exclusion supported an argument that the exclusion applied to suits brought by employees of any Named Insured, while the exclusion otherwise referred only to employees of the Named Insured.
As we have explored in prior posts—privilege can be a tricky thing to navigate in the insured-insurer context. While protecting privileged information is an obvious priority for all parties at all times, privilege gets especially gnarly when all things do—in litigation. In the throes of discovery, plaintiffs and defendants want access to all of their adversary’s information that is relevant and material to the prosecution or defense of the case, while protecting their own privileged information from disclosure. A recent case from New York Supreme Court reminds us that attorney participation in the creation of documents does not automatically cloak them in privilege.
Plaintiff insurers in New Hampshire Insurance Co. v. MF Global Finance USA Inc. (Index No. 601621/2009) are seeking a judgment declaring that MF Global is precluded from recovering under financial institution bonds issued by plaintiffs. In the defense of the case, MF Global sought the production of documents prepared during the period preceding the insurers’ coverage determination. The plaintiff insurers asserted the attorney-client privilege in refusing to turn over documents concerning their analysis of whether or not coverage should be extended. When faced with determining whether an investigative coverage report is privileged in New York State, the question boils down to whether an insurer’s lawyers were acting as claims investigators or attorneys. Claims handling is understood to be an ordinary business activity for an insurance company and not privileged.
The Special Referee in the case conducted an in camera review and determined that prior to the decision to deny coverage, the insurers’ lawyers were acting as claims investigators and not attorneys. The Referee recommended production of all documents predating the coverage decision. MF Global moved to confirm the Referee’s Report in its entirety and certain plaintiff insurers moved to reject it. The court rejected as overbroad the Referee’s conclusion that privilege does not apply to any documents prepared prior to coverage denial. However, the court found that the insurer plaintiffs failed to establish their claim that the services at issue were legal and not investigatory in nature, and rejected the affidavits of the insurers’ in house claims examiners stating that counsel were retained to provide legal advices, finding them “conclusory” and “lacking in probative value.” At the same time, however, the court acknowledged that in addition to acting as the claims investigators, the insurers’ counsel also provided legal advice and legal services prior to the coverage determination, and concluded that such documents were protected from disclosure.
The main takeaway here is the reminder that the “hiring of counsel to perform the ordinary business activity of claims investigation cannot  serve to cloak  pre-denial documents with the attorney client privilege.” If the documents are relevant, insureds are entitled to production of such documents in discovery and are advised to carefully inspect privilege logs to ensure that insurers are not improperly claiming privilege over documents related to a coverage determination on the basis that an attorney was involved. This New York State court decision reminds us that the retention of counsel is not an automatic shield. Documents must be primarily of a legal character—e.g., include case law or choice of law analysis, reveal legal strategy, or contain other evidence of the provision of legal services—in order to qualify for protection. Even then, the documents may only warrant redactions, and may not be withheld in full, from insureds.
Most standard form commercial general liability insurance policies provide that the insurer has the duty to defend any “suit” against the insured that seeks damages covered under the policy. In CGL policies issued before 1986, the term “suit” was not defined. And while all courts could agree that a “suit” encompasses a civil complaint filed in a court of law, they disagreed on whether proceedings that take place outside the courtroom, such as the administrative process initiated by a government ”PRP” notice, are “suits” that give rise to the insurer’s duty to defend.
The Texas Supreme Court is the latest court to weigh in on this issue, and its decision is good news for policyholders. On June 26, 2015, in a 5-4 decision, the court held that the term “suit” encompasses administrative enforcement actions by the Environmental Protection Agency under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA).
Insurers have taken to the skies! Unmanned aircraft systems, or drones, are, in the estimation of the Federal Aviation Administration, “the most dynamic growth sector within the aviation industry”—and insurers are in on the action, with some of them recently having taken steps to use drones in their business operations.
In the past month, at least four insurers—AIG, USAA, Erie Insurance Group, and ADM Crop Risk Services—have obtained approval from the FAA to operate drones to assist in their claims, risk assessment and underwriting practices, and for research and development into future deployment of the remotely controlled craft. State Farm also won such approval earlier this year.
The authorizations last for up to two years, and each comes with many conditions and limitations on the use of drones. For example, the drones may be operated only over privately controlled property with the permission of the owner. They must generally stay at least 500 feet from all “nonparticipating” persons, vessels, vehicles and structures. They can only be operated up to 400 feet above ground level, and cannot move at a speed above 50 or 100 miles per hour, depending on the drone. A drone also must remain within the visual line of sight of its operators at all times, and night flights are not permitted. The conditions appear to closely track the FAA’s proposed drone regulations (which are discussed in greater detail in our colleagues’ recent analysis).
While there have been a number of high-profile data breaches in recent years, there have been few coverage lawsuits arising out of these breaches, presumably because cyber insurers have been paying claims. A recent action, however, suggests how cyber insurers may be trying to fund this coverage position: by suing allegedly responsible third parties. In what appears to be a novel approach for insurers covering data breach claims, Travelers Casualty and Surety Co. of America has sued its insured’s website designer in the wake of a cyber attack. Travelers’ complaint alleges that its insured, Alpine Bank, hired Ignition Studio, Inc. to design and service the bank’s website. Travelers alleges that Ignition negligently designed and maintained the website, allowing hackers to access the site through the server on which it was hosted. Alpine spent over $150,000 complying with its data breach notification obligations, for which it was reimbursed by Travelers. Travelers, as Alpine Bank’s assignee and subrogee, now seeks to recover that amount from Ignition.