A federal district court in the Eastern District of New York recently held that a D&O policy’s definition of “Loss” that includes amounts an insured is “legally obligated to pay” extends to consent judgments that forebear collection by the underlying plaintiffs. In Intelligent Digital Systems, LLC, v. Beazley Insurance Co., Inc., the court joined a majority of courts in other jurisdictions that have addressed the issue and rejected the insurer’s argument that because individual directors and officers had entered consent judgments in which the plaintiffs agreed not to collect against them, they had not suffered any “Loss” as defined by the policy. This ruling arose out of a series of stipulated agreements made in an underlying lawsuit by plaintiff Intelligent Systems, LLC against some former directors of the surveillance technology company, Visual Management Systems, Inc. In exchange for the directors’ assigning their coverage rights under their policy to Intelligent Systems, LLC, the underlying plaintiff agreed to “unconditionally forebear” its collection of the judgments against the insured directors. The agreement, however, expressly provided that the insured directors did not waive the right to assert a claim against the D&O insurer.
To reach this ruling, the Court considered a legal question of first impression under New York law: Does a consent judgment, with conditions effectively exculpating an insured from satisfying a judgment for which he might otherwise be personally liable, constitute an amount that the insured had become “legally obligated” to pay?
Try as it might, Mitsui Sumitomo Seguros S.A. (“Mitsui”) could not kick an arbitration award that potentially freed its insured’s suppliers from liability for a 2007 incident at a Brazilian aluminum plant insured by Mitsui. Mitsui’s argument that it was not a party to the arbitration agreement between its insured—Alumina de Norte do Brasil S.A. (Alunorte), and the insured’s suppliers, Alstom Power, Inc. and Alstom Brasil Energia e Transporte Ltda—failed because the Mitsui-Alunorte insurance contract gave Mitsui a clear subrogation right and “an insurer-subrogee stands in the shoes of its insured.”
On Monday, June 20, 2016, Judge Hellerstein of the Southern District of New York held that Mitsui Sumitomo Seguros S.A. is bound by an arbitration clause between Alunorte and the insured’s suppliers, Alstom Power, Inc. and Alstom Brasil Energia e Transporte Ltda. Alunorte, a Brazilian aluminum refiner entered into a supply contract with Alstom Power and Alstom Brasil, a Brazilian power-generation service and equipment provider. The contract contained a clause stipulating that upon failure of good faith negotiations between the parties the disagreement would be arbitrated in New York under International Chamber of Commerce rules.
This case arises from an ICC ruling regarding two separate incidents involving products supplied by Alstom at the Alunorte facility, which resulted in lost property and profits. Mitsui sued Alstom in Brazilian courts for the indemnity payment it made to Alunorte following the incidents, alleging that Alstom was the cause of the damage. Alstom sought to have the claim dismissed in Brazil, and moved to the ICC in New York, per the arbitration clause in the supply contract. Mitsui entered a special appearance before the ICC, asserting that the ICC lacked jurisdiction in the matter. The ICC court claimed jurisdiction over the dispute and ultimately dismissed Mitsui’s indemnity claim against Alstom, finding that Alstom was not at fault for the incidents occurring in Alunorte’s facility and holding that Mitsui was bound to the arbitration agreement between Alunorte and Alstom as a subrogee of Alunorte.
Alstom sought to confirm the arbitration award in New York state court and Mitsui removed the case to the Southern District of New York. Mitsui filed a motion to dismiss Alstom’s petition, arguing that it was not bound by the arbitration clause provided in the supply contract, that the district court of New York lacked personal jurisdiction, and that dismissal was appropriate on forum non conveniens grounds. Judge Hellerstein found for Alstom and confirmed the award.
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.
Happy New Year! For a sneak peek at the developments the year may bring to the legal landscape for insurance policyholders, here are five cases worth watching in 2015:
1. Fluor Corporation v. Superior Court (Hartford Accident and Indemnity Company), No. S205889 (Cal. filed Oct. 10, 2012)
The California Supreme Court likely will issue its long-awaited decision in Fluor and, in doing so, may overturn its controversial 2003 decision concerning the assignment of insurance policies to successor corporations in Henkel Corporation v. Hartford Accident and Indemnity Company, 29 Cal. 4th 934 (2003). If the Court overturns Henkel, California would join the majority of states that permit a successor corporation to recover under the predecessor’s liability insurance policies for pre-assignment liabilities, regardless of a “no-assignment” provision in the policies. The Fluor case has been fully briefed for more than a year, and many California attorneys expected the Court to issue its decision in 2014. In the interim, California Governor Jerry Brown has recently appointed two new justices to the Court, which some commentators believe may push the court in a more liberal direction and could affect the Court’s decision.