Archive for November, 2012

Superstorm Sandy – NY Governor Cuomo Issues Executive Order Regarding Adjuster Licenses

Friday, November 30th, 2012

It has been a month since Superstorm Sandy hit the east coast causing tens of billions of dollars of damage to homes and businesses. On the insurance front, various states have revised regulations or issued executive orders impacting the way claims are assessed and handled. Today, NY Governor Cuomo issued an executive order directing that temporary licenses be issued on an expedited basis to out-of-state insurance adjusters. In addition, the NY Department of Financial Services (DFS) issued a new regulation requiring insurance companies to start investigating claims in 6 business days, rather than 15 days under current rules. The DFS website will feature online report cards on performance of insurance companies since the storm.

Following the storm, governors of New York, New Jersey, Connecticut and Maryland directed insurance companies not to enforce the homeowners’ hurricane deductibles given that the National Hurricane Center downgraded sandy to a “post-tropical storm” just before it made landfall. But, other states may allow insurance companies to enforce the hurricane deductibles. For instance, Sandy was still classified as a hurricane when it passed by North Carolina.

Estimates are that there will be between $10 billion to $20 billion in insured losses from the superstorm.

We are closely following the business and insurance implications from the storm and will provide updates on regulations and litigation as they arise.

 

Second Circuit Finds that Insured’s Notice to Broker Is Not Notice to the Insurer and Precludes Coverage for Property Owner’s Damage Claim

Wednesday, November 28th, 2012

By David Dolendi

In Pfeffer v. Harleysville Group, Inc., No. 11-CV-4513, 2012 WL 5392933 (2d Cir. Nov. 6, 2012) (applying New York law), a panel of the U.S. Court of Appeals for the Second Circuit held that the insured’s notice of a property damage claim to his insurance broker did not constitute notice to his insurance carrier under New York law.

The insured owned a six-unit apartment building in Brooklyn.  In December 2006, the insured received complaints from his tenants about noise and vibrations caused by a nearby construction project.  The insured investigated the complaints and noticed minor cracks and wall shifts in his building and reported the incident to his insurance broker.  The broker advised him to “wait and see” if the damage became worse upon the completion of the neighboring construction before filing a claim.  The insured then proceeded to retain engineers to evaluate the damage and also hired an attorney to pursue legal action against the adjacent property owner.  The loss was eventually reported to the insurer in January 2008, which was more than a year after the insured first contacted the broker.

The insurer denied coverage for the claim based on the condition in the policy that required the insured to provide the insurer with “prompt notice of the loss or damage.”  The insured filed suit in New York state court seeking coverage for the loss.  The insurer removed the case to the federal district court and then immediately moved for summary judgment.  The district court granted the insurer’s summary judgment and held that the insured’s delay of more than a year to report the property damage claim was untimely and unexcused.  The Court of Appeals affirmed the decision, finding that the insured’s notice of the loss was not “prompt” because he consulted two engineers, took extensive notes regarding the damage, and retained an attorney to pursue litigation against his neighbor all before notifying the insurance carrier.  The Court of Appeals also rejected the insured’s argument that the untimely notice should be excused because he reasonably relied on the broker’s advice that he should wait to evaluate the damage before filing the claim with the insurer.  The court noted that New York courts have previously held that notice to a broker is not notice to the insurance carrier.

It does not appear from the court records that the insured also asserted a claim against the broker for professional negligence, but the Sedgwick Insurance Law Blog will be following any developments in this matter.

 

Data and Privacy Breach Experts Warn That Insurers Should Expect Increasingly Frequent, Severe Data Breach Claims

Wednesday, November 21st, 2012

By Scott Bloom

Insurers can expect increasingly frequent and severe data breach claims, a panel of data and privacy breach experts told the Professional Liability Underwriting Society’s International Conference in Chicago, November 7-9, 2012.

According to a recent study, incidences of data breach have nearly doubled over the last 12 months, as regulators, insurers and institutions struggle to respond to security risks and the proliferation of shared data storage (so-called “cloud computing”).  It can take a hacker or malicious computer virus minutes to gain access to stored data, leading to months or even years of costly remediation.  Lost laptops and storage drives present another risk.  At a cost of about $194 per record, the price of remediation is high and claims can easily run into the millions.  Loss due to data breach includes the cost of credit monitoring, ID restoration, investigatory costs, repairing damage caused by the breach, and the costs of notice and reporting.

Currently, federal guidelines require health care companies to notify the public and the Federal Trade Commission (FTC) of a data breach within 10 to 60 days of its discovery (the deadlines vary depending on the number of consumers involved).  Violators face fines and public rebuke by regulators.  In June, the FTC filed a lawsuit against the Wyndham Hotels chain, alleging that the chain failed to take sufficient security measures to avoid the repeated loss of customer credit card data.

Not every attack on a computer network causes a data breach.  Determining whether private information has been purloined is an important task, according to attorney Ted Korbus, an expert in the area of privacy breach.  Korbus told the panel that state Attorneys General are exerting increased pressure on companies to react quickly to any breach of data, no matter how severe.  Determining whether an incident should be reported is critical, because an unnecessary report can be expensive, whereas a late report can be costly from a regulatory perspective.  A close relationship with state and federal regulators is critical to a company successfully resolving a data breach incident, Korbus said.

All of the panel members agreed that “cloud” computing presents the greatest threat to insurers and their policyholders.  Cloud-computing vendor agreements are often heavily weighted in favor of the host company, but provide little assurance to customers.  Cyber-risk insurance policies do not always cover a data breach that occurs on another (non-insured) computer network.  When insurers try to evaluate an insured’s cyber-risk, the use of cloud computing should be closely examined, technology E&O underwriter Michael Carr said.  “From a business standpoint, the cloud is very compelling and may be safer.  It’s here to stay.”  Carr cited examples of online data storage companies that were shut down by regulators as a result of users exchanging copyright-protected materials on the cloud.  Innocent users lost all of their data when the servers were shut down, with no recourse in their own cyber-risk policies.

Panel members agreed that the application and vetting process was critical to underwriting.  “Ultimately, you have to understand the culture of your insured [when underwriting],” Carr said. Other concerns for insurers include aggregation of multiple claims, and coverage for regulatory investigations.  Korbus expects that insureds will closely analyze their cyber-risk and privacy policies.  All of the panel members emphasized proactive measures to prevent data breach in the future.  Educating workers and providing anonymous tip lines are two examples of how to lower the risk of a data breach event.

PLUS: http://plusweb.orgFTC suit: http://www.ftc.gov/opa/2012/06/wyndham.shtm

Advisen study: http://corner.advisen.com/pdf_files/Reputational_Risk_Data_Breach_2012NAS.pdf

 

Connecticut Supreme Court Caps Self-Insurers’ Uninsured/Underinsured Motorist Coverage

Wednesday, November 21st, 2012

We thought our readers would be interested in this case from Connecticut involving the state’s cap on self-insurers’ liability for un/underinsured motorists.  Although the case came down from the Connecticut Supreme Court in September, we thought it was worth noting in light of the upcoming holiday travel season.

In Garcia v. City of Bridgeport, 51 A.3d 1089 (Conn. Sept. 11, 2012), the Connecticut Supreme Court determined that Connecticut law caps self-insurers’ liability for uninsured/underinsured motorist coverage at $20,000 per person and $40,000 per occurrence.  
 

There, Garcia, an employee of the City of Bridgeport, suffered injuries in a motor vehicle accident caused by an underinsured motorist.  Garcia recovered $50,000 from the motorist’s insurer, and filed a claim with the city for the balance of his damages.  The city, which self-insured its uninsured/underinsured obligations, denied Garcia’s claim on the ground that he already recovered damages in excess of the minimum $20,000-per-person limit for uninsured/underinsured motorist coverage.  Garcia sued, alleging that the city’s uninsured/underinsured motorist coverage was unlimited because there was no pre-accident writing demonstrating the city’s election to provide lesser limits of liability.    

Although Connecticut law requires that “insurers” notify and obtain the informed consent of their insureds of this election prior to an accident (see Conn. Gen. Stat. § 38a-336(a)(2)), the Connecticut Supreme Court concluded that this notification requirement did not apply to self-insurers.  The court reasoned that “a self-insurer is both the insurer and the insured, so a construction of this statute that requires an equivalent notice by a self-insurer and a corresponding request by a self-insured is untenable and unnecessary to protect the insured.”  After noting that the “essential and fundamental concern of [Connecticut's] motor vehicle liability scheme” was to guarantee minimum coverage, the court concluded that, under section 38a-336(a)(2), a self-insurer’s uninsured/underinsured motorist coverage obligations are limited to the statutorily prescribed minimums of $20,000 per person and $40,000 per occurrence. 

By Aaron Mandel

Admiralty and Energy News

Tuesday, November 20th, 2012

Our Admiralty and Energy Practice Group recently issued its November newsletter.  This issue discusses recent opinions on admiralty jurisdiction and indemnification in the Deepwater Horizon MDL and a recent decision by the South Dakota Supreme Court involving a policy’s exclusions regarding windmills, windchargers or towers.  Please click here to read the full issue.

Sedgwick Partners are Thought Leaders

Friday, November 16th, 2012

First, we wish our readers well in the Northeast in the continued clean up and recovery from Super Storm Sandy.

We also wanted to let you know about two industry-shaping efforts by our partners. Richard Geddes, a partner in Chicago, was named a winner, along with his co-authors, of the 2012 British Insurance Law Association Charitable Trust Book Prize for their book, “The Bermuda Form: Interpretation and Dispute Resolution of Excess Liability Insurance” (Oxford University Press, 2011). The annual book prize is awarded by the trustees of the BILA Charitable Trust to the authors of a published work constituting “in the opinion of the Trustees the most notable contribution to literature in the field of law as it affects insurance.” Mr. Geddes has been advising clients on the drafting of this policy form, and acting for them in disputes under the form, for more than 25 years.

In addition, Bruce Celebrezze, the chair of our Insurance Practices group. is a founding member of the Board of Regents of the American College of Coverage and Extracontractual Counsel. The College was created in November 2012 by leading lawyers in the U.S. and Canada to improve the quality of the practice of insurance law. The College focuses on the creative, ethical and efficient adjudication of disputes between policyholders and insurers over insurance coverage and extracontractual claims alleging bad faith or unfair claims-handling practices. Its members represent the interests of both insurers and policyholders. The College’s mission includes educating all sectors involved in insurance disputes — including the judiciary, legal and insurance professionals, and businesses — on critical topics such as best practices in policy formation and claims handling, developing trends in insurance law, and bad faith. Another important component is the drive to increase civility and professionalism in the field, thereby improving relations between insurer and policyholder counsel and resulting in better representation for all clients. The College will engage in a wide variety of activities, including seminars and the sharing of scholarship, to promote these goals. (Link to college website – americancollegecec.org.)

 

California Court of Appeal Holds No “Advertising Injury” Coverage for Product That Is Neither Mentioned Nor Disparaged in Advertisement

Friday, November 9th, 2012

By Jamison R. Narbaitz

In Hartford Casualty Ins. Co. v. Swift Distribution, Inc., __ Cal.Rptr.3rd __, 2012 WL 5306248 (Cal. Ct. App. Oct. 29, 2012), the California Court of Appeal held that the “advertising injury” coverage in a CGL policy does not apply when the insured’s advertisement neither mentions nor disparages the claimant’s product.  The claimant, Dahl, manufactured and sold a product known as the “Multi-Cart.”  Dahl sued Ultimate for patent infringement, unfair competition, dilution of a famous mark, and misleading advertising arising from Ultimate’s sale of a similar product, the “Ulti-Cart.”  Ultimate’s advertisement did not expressly refer to Dahl’s Multi-Cart, nor did it disparage Dahl’s product or business.

Hartford Casualty Insurance Company insured Ultimate under a CGL policy that covered advertising injury, defined to include “injury … arising out of … [o]ral, written or electronic publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services… .”  Hartford denied coverage for the underlying action and sought a declaratory judgment that it had no obligation to defend or indemnify Ultimate.  On cross-motions for summary judgment, the Los Angeles Superior Court granted Hartford’s motion and denied Ultimate’s motion, finding that the Dahl action was not potentially covered under the policy.

The Court of Appeal affirmed.  The court observed that the underlying action alleged that Ultimate engaged in advertising with the intent to mislead the public:  (1) as to the origin and ownership of Dahl’s mark; and (2) into believing that Ultimate’s products were the same as Dahl’s or were authorized by or related to Dahl.  The court held that disparagement, or injurious falsehood, must specifically refer to the derogated product either expressly or by reasonable implication.  The court found that even though the advertisement could have caused the public to confuse Ultimate’s Ulti-Cart with Dahl’s Multi-Cart, the advertisement did not refer to or disparage the Multi-Cart.  The court criticized the recent decision in Travelers Property Casualty Co. of America v. Charlotte Russe Holding, Inc., 207 Cal.App.4th 969 (2012), for improperly expanding the scope of potential coverage for disparagement to include disparagement by implication and held that Dahl’s allegations could not show a potential for coverage under such a theory of disparagement.

Fifth Circuit Upholds Insurer’s Right to Appoint Defense Counsel in Legal Malpractice Case

Thursday, November 8th, 2012

By Daniel Pickett

In Coats Rose Yale Ryman & Lee PC v. Navigators Specialty Insurance Co., 2012 WL 4858194 (5th Cir. October 15, 2012), the U.S. Court of Appeals for the Fifth Circuit upheld a lower court’s grant of summary judgment to Navigators. This was an action brought by an insured law firm seeking a declaration that Navigators had a conflict of interest and, therefore, must pay for independent counsel to defend the firm in a malpractice case.

The parties had cross-moved for summary judgment before the U.S. District Court for the Northern District of Texas. The insured (a law firm) argued that, although Navigators had yet to reserve its right to disclaim coverage based upon the dishonesty exclusion, its ability to do so in the future created a conflict of interest.  Navigators maintained that it had not reserved its right, and would not, to deny coverage based on the exclusion.   The District Court explained that a “potential” conflict of interest was not sufficient to trigger an insured’s right to select independent counsel and, therefore, held that the insured had failed to establish that there was a conflict of interest.

The insured also argued that a conflict of interest existed because the Navigators’ policy covered compensatory damages, but not the return of fees, and an attorney chosen by Navigators would be able to steer any award toward uncovered damages.  The court rejected this argument because, among other things, it would not be in Navigators’ interest for the attorney defending the firm to concede facts that would lead to a return of fees award because such a concession would acknowledge wrongdoing, likely increasing any compensatory damages award.

The Appellate Court, in a relatively short decision, based its decision on “substantially the same reasons” set forth in the District Court’s decision.

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