Vendor impersonation is one of the typical varieties of “Business E-mail Compromise” (BEC) scams. In spoofing the e-mail of a trusted vendor, the fraudster persuades a company to redirect its vendor payments to a fraudulent bank account. While courts have found that commercial crime policies cover loss from BEC scams, a recent Fifth Circuit decision found no coverage for the victim of a vendor-impersonation BEC scam under the computer fraud provision of the company’s crime protection policy. Rejecting the company’s arguments that the coverage provision was ambiguous, the court held that the fraudulent e-mail was not the cause of the fraudulent transfer. Orrick attorneys Russell Cohen, Aravind Swaminathan, and Harry Moren comment on this troubling decision at our sister blog, Trust Anchor.
An issue often arises in property damage claims about whether the loss was caused by a single “occurrence”, or more than one “occurrence”, since deductibles are per-occurrence. In a recent Fifth Circuit case, that was a $17 million question, with the court holding that damage suffered by an oil rig was caused by two separate storms, and thus neither one satisfied the policy’s $10 million deductible. The court held that it did not matter that the initial storm was a “but for” cause of the rig damage; since the second storm was the “proximate” cause of the damage.
The policyholder in front of the court was Seahawk Liquidating Trust, and the policy was underwritten by five insurers. The policy covered an oil rig, known as the J/U SEAHAWK 3000 in use by Seahawk since 1974. The rig suffered damage in February 2010 during severe weather, which resulted in misaligned legs, among other issues. Seahawk learned that the rig’s legs were misaligned at some point in May 2010, but did not fix the issue at that time due to cost considerations. The rig stayed in use throughout this period with the crew making modifications to compensate for the misaligned legs. On July 21, 2010, the rig experienced another severe weather event. It was damaged again, in part because of the modifications caused a portion of the rig to detach and float out to sea, where it remained for nearly thirty hours in rough waters.
Seahawk sent the rig to dry dock for repairs after the July storm and submitted an insurance policy claim to cover the cost of repairs between February and December 2010, alleged to be nearly $17 million. Seahawk claimed that these repairs were all part of a singular occurrence, defined in the policy as “a sequence of losses or damages arising from the same occurrence.” The first storm in February, according to Seahawk, caused the legs of the rig to become misaligned, and this misalignment was a “but for” cause of the damage suffered by the rig in the July storm. According to this theory, all of the damages between February and December 2010 arose from the same February occurrence that caused the rig’s legs to become misaligned and thus were part of one occurrence. The Insurers disagreed, contending that each storm was a separate occurrence under the policy, and that neither occurrence met the policy’s $10 million deductible. The dispute went to trial and the trial court agreed with the insurers.
The Fifth Circuit affirmed the district court ruling in favor of the insurers. Applying Texas law, it found that the policy required that the occurrence be the proximate cause of the “sequence of losses or damages.” The court considered earlier cases where a cause, such as a single arsonist or a defectively installed plumbing system in an apartment complex, caused multiple events that led to loss, such as multiple fires or leaks in numerous buildings. Despite arguments in those cases that the loss events should be considered a single occurrence, as they shared the same “but for” cause, Texas courts disagreed. Instead, an occurrence is defined by the specific events that caused the loss. If an arsonist lights two separate fires, each is an event. If many different buildings suffer damage from a leak, each is a separate event–even though all the leaks stemmed from the same faulty installation.
The Fifth Circuit applied this reasoning here. Even if the February storm damage was the “but for” cause of the later events, since it led to the misaligned legs that required the modifications, the July storm was the proximate cause of the damages suffered in and after that storm. In support of this finding, the Fifth Circuit noted testimony that indicated the modifications used to compensate for the misaligned legs worked fine in calm weather and that the rig has had no further issues since the July storm, even though Seahawk never repaired the misaligned legs. According to the court, these were two separate occurrences.
The Fifth Circuit also affirmed the district court’s rejection of Seahawk’s claim that it lost a contract as a result of the damaged rig, enforcing the (anti) “concurrent cause” doctrine. Under that doctrine, a policyholder can only recover on losses caused solely by covered perils. Although the misaligned legs that were damaged in the storm would have been a covered cause, the court found that the rig’s history of problems with its hydraulic jacking system, which was not a covered cause, contributed to the loss.
The Fifth Circuit recently delivered good news to policyholders in a July 27, 2015 opinion that supports the argument that an indemnification right among co-insured parties may be covered, notwithstanding the insured-versus-insured exclusion. In Kinsale Insurance Co. v. Georgia-Pacific LLC, the indemnification right prevailed because the claim for which coverage was sought was for an indemnification request, not for the underlying property damage arising from a fire.
Georgia-Pacific hired Advanced Services, Inc. to demolish a plywood plant. Advanced Services, in turn, leased equipment for the work from H&E Equipment Services (“H&E”). When a fire in the plant damaged this equipment, H&E brought sued Advanced Services, which, in turn, brought a third-party demand for indemnification against Georgia-Pacific. Advanced Services held a Commercial General Liability policy issued by Kinsale Insurance Company, under which Georgia Pacific was an additional insured. The policy contained an insured-versus-insured policy exclusion that provided, in relevant part: “This insurance does not apply to claims or ‘suits’ for ‘bodily injury,’ ‘property damage’ or ‘personal and advertising injury’ brought by one insured against any other insured.”
Georgia-Pacific filed a claim under the insurance policy for any indemnification it might owe Advanced Services, but Kinsale Insurance denied the claim, citing the insured-versus-insured exclusion. The insurer then filed an action for a declaratory judgment that it did not owe indemnity to Georgia-Pacific, and the district court—applying Louisiana law—granted summary judgment in Kinsale’s favor. It held that the policy exclusion applied, as the original suit was for property damage, which is explicitly included in the exclusion.
The Fifth Circuit disagreed, finding that, because Advanced Service’s suit against Georgia-Pacific did not seek damages, but rather, indemnification, the exclusion did not apply. It was not persuasive to the court that the original action for which the indemnity was sought was for property damage, and the property damage claim was not brought by one insured against another. The court distinguished a prior Fifth Circuit case, Fidelity & Deposit Co. of Maryland v. Conner, pointing out that the exclusion in that case applied to any claim, without limitation based on the nature of the claim.
In making its decision, the court noted, “We do not deny that it is possible that Advanced’s indemnity claims could become a battle between two insureds over who, if either, was responsible for the fire and even whether there was shared responsibility. One central purpose of the insured versus insured exclusion no doubt is to keep the insurance company free from such litigation.” Nonetheless, the court found that the exclusion did not apply because this was not a claim for property damage, but one for indemnity.
The Fifth Circuit’s decision serves as a reminder for policyholders to look carefully at their insured versus insured exclusion to see if it is broadly worded to apply to all claims, or whether it is limited to certain types of claims, such as bodily injury and property damage in this case.
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).
When the Texas Supreme Court decided In re Deepwater Horizon earlier this year, it portended significant changes in the rights of companies named as “additional insureds” pursuant to contractual requirements. In limiting BP’s coverage for the Gulf of Mexico oil spill, the Court departed from the principle that insurance policies should be interpreted based on their express terms. The Texas Supreme Court instead based its ruling on BP’s drilling contracts, which were not mentioned in the insurance policies. Now the U.S. Court of Appeals for the Fifth Circuit, in Ironshore Specialty Insurance Co. v. Aspen Underwriting, Ltd., has extended Deepwater Horizon and starkly illustrated its implications.
Resolving one of the cases on our 2015 watch list, the Texas Supreme Court responded on Friday, February 13 to certified questions from the Court of Appeals for the Fifth Circuit that arose from an insurance dispute between BP and Transocean, the Deepwater Horizon oil rig owner and operator, over coverage for subsurface pollution liabilities arising from the explosion on the rig in 2010.