Archive for the ‘Insurance Practices’ Category

Damages for Late Payment of Insurance Claims

Monday, November 9th, 2015

By Andrew Milne, Sedgwick London

The UK Government recently proposed legislation to provide policyholders with the right to sue their insurers for damages caused by late payment of valid claims. This new section on late payment damages was introduced in the Enterprise Bill in September 2015, and is currently being considered by the two chambers of the UK Parliament, the House of Lords and the House of Commons.  If passed by the UK Parliament, as is expected, the Enterprise Bill would bring insurance policies governed by English and Welsh law into line with that of many other jurisdictions, including most US states.  It could lead to a new clause being inserted into the Insurance Act 2015 (which becomes effective in August 2016), and would introduce an implied term into every insurance and reinsurance contract requiring payment of any sums due in respect of a claim within a reasonable period of time.  Insurers that fail to adhere would be liable to pay damages in addition to claim payments and interest.  Damages could be substantial where insureds or reinsureds can demonstrate that late payment had a significant impact on their business.

Assessing what is a reasonable time in which to pay a claim depends on the facts of each case, but is likely to be influenced by (1) the type of insurance, (2) the size and complexity of the claim, (3) the need to comply with any relevant legislation, and (4) factors outside an insurer’s control.  Insurers that can show they are waiting for information from an insured which is reasonably needed before paying a claim are likely to have a solid defense.  Insurers will be able to contract out of these changes when dealing with business insurance, provided they draw the relevant term to the insured’s attention before the policy becomes effective. It remains to be seen whether insureds would agree to this.

The determination to include this section to the Enterprise Bill comes as a surprise given that a similar provision in the Insurance Bill (now the Insurance Act 2015) was eliminated because it was deemed too controversial for inclusion in that bill.  It has not received a unanimous welcome in the insurance market, as concerns have been raised that the new term could be exploited by policyholders and give rise to US-style bad faith litigation.  Lloyd’s reportedly is lobbying for the section to exclude insurance for large risks; however, the proposed changes likely will be retained given the UK Government’s concerns about the effect a delay in paying a claim can have on an insured’s ability to resume trading after an insured loss.  Insurers should consider reviewing their internal claims risk management procedures, and perhaps ensure that claim denials, and situations involving delayed payment of a claim, are reviewed and approved by management.  Insurers also should confirm that third-party administrators or other entities involved in claims handling are aware of the new provisions, and further review their own insurance coverage to ensure cover for any damages awards.

The Road Ahead for Automated Cars

Wednesday, October 28th, 2015

By Hilary Rowen, Sedgwick San Francisco

Cars are starting to drive themselves. “Driver assistance” features—such as lane maintenance, adaptive cruise control, automatic braking and parking—are featured in some current model cars. Both traditional automobile manufacturers and technology companies, most notably Google, are developing more fully autonomous cars.

The new automotive technology will have three trajectories: the incremental addition of increasingly sophisticated driver assistance features to traditional automotive technology; the introduction of vehicles with operator controls that are designed to be fully autonomous in at least some driving situations; and the introduction of vehicles that do not have operator controls. The first two options are different paths to the same goal: a car that can drive itself much of the time, but that needs an operator as backup. These cars will be versatile. Under operator control, these cars can be driven anywhere and in any driving conditions. Under automated control, the cars will be able to drive themselves in many locations and a range of driving conditions. The third option—the purely robotic car—will probably be restricted to a narrower range of geographic locations: surface streets in urban downtowns and suburban locations with a high concentration of technology companies will likely be the initial venues for street-legal robots.

For more information about driverless cars and the future of insurance policies click here.

© 2015 Reprinted with permission,, October 26, 2015

Note: the title of the printed version of this article was “Sharing the road: Automated cars and human drivers.”

Self-Driving Cars: A View from 2025

Tuesday, September 29th, 2015

By Hilary Rowen, Sedgwick San Francisco

An array of self-driving cars will be on the road within the next decade. Over the next few years, sensors and software will substitute for the human driver in an increasingly wide range of driving conditions. What will the driving and auto insurance worlds look like in 2025?

A Vision of the Future in 10 Years

By 2025, fully autonomous vehicles, with no driver controls, likely will be deployed in a variety of settings. However, the geographic footprint and driving conditions in which fully automated vehicles can travel will remain restricted. These driverless vehicles primarily will be owned by commercial operations, rather than individuals. They will be quite common in some locations, including downtown areas of large cities, suburban technology clusters and tourist destinations.

Further deployment will depend not only on technological developments but also on political debates not dissimilar to the current issues arising from the launch of Uber in various cities.

To continue reading…

© 2015 Reprinted with permission,

Washington Bad Faith Law at a Glance

Thursday, September 10th, 2015

By Bob Meyers, Sedgwick Seattle

Sedgwick Seattle partner Bob Meyers has authored a white paper, Washington Bad Faith Law At A Glance, which discusses bad faith law in Washington state. Noting that Washington state can be a difficult jurisdiction for insurers, and their duties of care are sometimes interpreted or applied quite broadly, Meyers cites notable Washington authorities relating to common law bad faith, the Consumer Protection Act, and the Insurance Fair Conduct Act. For ease of reference, he also includes excerpts from notable Washington insurance statutes and regulations.

Bob Meyers has extensive experience representing U.S. and international insurers in complex, high-value insurance matters, including advising clients about their rights and obligations under insurance policies, bad faith law, and insurance statutes and regulations, and representing insurers in disputes and lawsuits.

New Frontiers for Financial Institution and Directors & Officers Insurance

Tuesday, September 1st, 2015

By Andrew Milne, Sedgwick London

Recent years have shown that regulators in developing countries are becoming more active in investigating corporate misfeasance and improper conduct of directors.

In India, action has been taken in recent months by the Securities and Exchange Board of India, the Serious Frauds Investigation Office, and the Central Bank of India against former executives and the founder of Satyam Computer Services for false accounting and pocketing wrongful gains from share transactions.  Regulators have imposed bans on the individuals’ involvement in capital markets, issued orders requiring them to repay millions of dollars to Satyam, and brought criminal proceedings against them.

In Brazil, a massive corruption scandal involving contract fixing and bribery at the state oil company Petrobras has caused, among other things, the arrest of 18 Petrobras employees and a wide ranging investigation being commenced by Brazil’s securities commission, Comissao de Valores Mobiliaros, into the conduct of Petrobras’ directors and the directors of a number of companies awarded construction contacts by Petrobras.

Although these corporate scandals could be seen as outliers, it appears more likely they mark an increased trend for regulators in India, Brazil and other developing jurisdictions in asserting firmer action against the directors and officers of companies involved in corporate misfeasance and corruption.  This is partly driven by the growth of the middle class and demands for improved governance at the public and corporate levels, as well as tougher sanctions for those who fail to adhere to the standards expected.

Indeed, recent legislation passed in both jurisdictions should have the effect of tightening the regulatory regime faced by companies and their directors with the Indian Companies Act of 2013 establishing for the first time the duties of independent directors, and the Brazilian Clean Companies Act of 2014 subjecting Brazilian companies (and foreign entities with Brazilian offices) to civil and administrative sanctions for bribery of domestic or foreign public officials.

These developments should lead to an increase in the demand for FI and D&O coverage, and may create opportunities for insurers to increase their market share through increasing their customer base.  However, insurers should be cautious and consider seeking appropriate advice so that they properly understand the coverage, claims, and regulatory issues that may arise from accepting risks in developing nations.

10th Circuit Upholds Insurer’s Application of Insured-Versus-Insured Exclusion to FDIC Receiver Claims

Friday, August 28th, 2015

By Kimberly Jackanich, Sedgwick San Francisco

Recently the Tenth Circuit Court of Appeals in BancInsure, Inc. v. F.D.I.C., Case No. 14-3063, 2015 WL 4647980, held that an insured-versus-insured exclusion unambiguously barred claims brought by the FDIC as a receiver against an insured bank’s former directors. The decision universally upheld the reasoning and holdings reached by the United States District Court for the District of Kansas in finding that the plain language of the insured-versus-insured exclusion provided for its extension to claims brought by receivers of the insured, including the FDIC. In reaching its holding, the court rejected the insured’s arguments that a shareholder derivative action exception, and a regulatory exclusion endorsement, in the insured’s policy superseded the insured-versus-insured exclusion or otherwise rendered it ambiguous with respect to claims brought by the FDIC.

The case arises out of a lawsuit filed by the FDIC in its capacity as receiver of the insured bank against the bank’s former directors and officers (D&O) alleging negligence, gross negligence, and breach of fiduciary duty. In response to the lawsuit, the insurer brought suit against the bank seeking a declaratory judgment that it owed no duty of coverage under the insured’s D&O policy pursuant to the insured-versus-insured exclusion in the bank’s policy, which provided:

The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against the Insured Persons based upon, arising out of, relating to, in consequence of, or in any way involving…a Claim by, or on behalf of, or at the behest of, any other Insured Person, the Company, or any successor, trustee, assignee or receiver of the Company…

Neither party disputed that the FDIC brought the lawsuit in its capacity as receiver of the bank. Instead, the Insured argued that, when the insured-versus-insured exclusion was read in light of other policy provisions, in particular the shareholder derivative exception and the regulatory exclusion endorsement, the exclusion was ambiguous as to whether it barred claims asserted by the FDIC.

The Policy included a shareholder derivative action exception which removed from the scope of the insured-versus-insured exclusion “a shareholder’s derivative action brought on behalf of the Company by one or more shareholders who are not Insured Persons and make a Claim without the cooperation or solicitation of any Insured Person or the Company.” Because the FDIC succeeds to all rights of a failed bank, including those of any stockholder, the Insured argued that actions by the FDIC share common characteristics with a shareholder derivative action such that the insured-versus-insured exclusion was inapplicable or at least ambiguous. The court rejected the Insured’s argument, emphasizing the explicit inclusion of “receiver” in the insured-versus-insured exclusion and concluding that the shareholder derivative action exception “cannot overcome the plain language of the policy.”

The Policy also included a regulatory exclusion endorsement, which eliminated a policy exclusion for “any action or proceeding brought by or on behalf of any federal or state regulatory or supervisory agency or deposit insurance organization,” and set forth an aggregate liability cap of $5 million for claims brought by such agencies. The Insured argued that the maximum aggregate liability cap provided coverage over claims previously excluded under the regulatory exclusion such that the endorsement should prevail over the original printed provisions of the Policy, including the insured-versus-insured exclusion. The Insured further argued that the endorsement evidenced “a clear intent to provide coverage” for actions previously excluded under the regulatory exclusion. Rejecting the Insured’s arguments, the court reasoned that, “removing an exclusion is not the same thing as affirmatively providing coverage.” The court further emphasized that an inference of coverage cannot be created from the deletion of an exclusion, especially where the endorsement clearly states the parties’ intent not to vary or waive other limitations of the policy. The court also rejected the Insured’s assertions that the regulatory action endorsement would be rendered meaningless by application of the insured-versus-insured exclusion, stating that “the mere overlap between the two exclusions does not introduce ambiguity into the plain language of the insured-versus-insured exclusion barring coverage of claims by ‘any…receiver of the Company.’”

The court’s holding reaffirms that an endorsement providing additional coverage is still subject to other policy exclusions and limitations, particularly when the endorsement explicitly provides that it does not alter, vary, or waive other policy provisions. Further, the court’s refusal to allow the regulatory exclusion endorsement to supersede the insured-versus-insured exclusion reinforces that courts will interpret policies as a whole. Thus, when endorsements are clear that they only affect designated parts of the policy, insureds may face an uphill battle in their efforts to broadly create affirmative coverage that was not intended by the insurers.

Insurer May Seek Recovery of Excessive, Unreasonable and Unnecessary Fees Directly From Cumis Counsel

Tuesday, August 11th, 2015

By Jason Chorley, Sedgwick San Francisco

On August 10, 2015, the California Supreme Court held that where an insurer (1) declines to defend its insured, (2) is compelled by court order to permit the insured to be represented by Cumis counsel, (3) is ordered to pay reasonable and necessary defense expenses while reserving the right to recover payments for unreasonable and unnecessary expenses, and (4) alleges that Cumis counsel charged fees that were excessive, unreasonable, and unnecessary, the insurer may seek reimbursement directly from Cumis counsel:

If Cumis counsel, operating under a court order that expressly provided that the insurer would be able to recover payments of excessive fees, sought and received from the insurer payment for time and costs that were fraudulent, or were otherwise manifestly and objectively useless and wasteful when incurred, Cumis counsel have been unjustly enriched at the insurer’s expense. Cumis counsel provide no convincing reason why they should be absolutely immune from liability for enriching themselves in this fashion. Alternatively, Cumis counsel fail to persuade that any financial responsibility for their excessive billing should fall first on their own clients — insureds who paid to receive a defense of potentially covered claims, not to face additional rounds of litigation and possible monetary exposure for the acts of their lawyers.


Hartford Casualty Insurance Company issued one commercial general liability insurance policy to Noble Locks Enterprises, Inc. and a second policy to J.R. Marketing, LLC. In September 2005, a lawsuit was filed against Noble Locks and J.R. Marketing and several of their employees in Marin County, California. Later actions were filed against the same parties in Nevada and Virginia.

The Marin County action was tendered to Hartford, which disclaimed a duty to defend. The insureds, represented by Squire Sanders, immediately commenced a coverage action against Hartford. Hartford subsequently agreed to defend its insureds subject to a reservation of rights, but declined to provide independent counsel. The court in the coverage action ordered on summary judgment that Hartford had a duty to defend the Marin County action as of the date of tender and must pay for Cumis counsel for its insureds. The insureds retained Squire Sanders as their Cumis counsel as well. The court in the coverage action also entered an enforcement order, prepared by Squire Sanders, ordering Hartford to pay all past and future defense invoices, declaring that Squire Sanders’ invoices still needed to be reasonable and necessary, and that if Hartford wanted to challenge fees, it may do so through a reimbursement action after the Marin County action concluded, and that, as a breaching insurer, Hartford forfeited the benefit of Civil Code section 2860’s limitations on rates.

After the Marin County action concluded, Hartford filed a cross-complaint against Squire Sanders and various persons for whom it paid defense expenses in the Marin County action. Hartford sought to recover a significant portion of the $15 million in defense fees, including some $13.5 million paid to Squire Sanders, for services rendered to non-insureds, rendered prior to the tender of the Marin County action, for any services in the Nevada or Virginia actions, and for “abusive, excessive, unreasonable, or unnecessary” fees. The trial court in the coverage action sustained the cross-defendants’ demurrer to the reimbursement and rescission causes of action in Hartford’s first amended cross-complaint. The trial court held that Hartford’s right of reimbursement was from its insureds, not directly from Cumis counsel. Hartford appealed.

The Court of Appeal affirmed the trial court decision concluding that allowing Hartford to seek reimbursement directly from Cumis counsel would frustrate the policies underlying Civil Code section 2860. The Court of Appeal further held that, where an insurer breaches its duty to defend and loses all right to control the defense, it is likewise barred from maintaining a reimbursement action against independent counsel where it considers those fees unreasonable or unnecessary. Hartford appealed.

California Supreme Court Discussion

In a majority opinion of Chief Justice Cantil-Sakauye, and Justices Werdegar, Chin, Corrigan, and Kruger, the California Supreme Court reversed the Court of Appeal decision insofar as the dismissal of Squire Sanders was upheld.

The Supreme Court noted the distinction between its finding of a right of restitution against the insured in Buss with its finding in the present case. In Buss, the Supreme Court held that, where an insurer defends a mixed action, it is entitled to reimbursement for those fees and costs attributable solely to defending claims not covered by the policy because the insured would be unjustly enriched at the insurer’s expense – the assumption being that those non-covered fees and expenses were still reasonable and necessary to the insured’s defense against those non-covered claims. Here, however, the question presented is whether independent counsel is unjustly enriched if its fees were excessive, unreasonable and unnecessary for the insureds’ defense to any claim, and not incurred for the benefit of the insured. The Supreme Court found in the affirmative, but limited to the facts of this case.

The Supreme Court rejected the argument that Squire Sanders was merely an incidental beneficiary of Hartford’s promise to pay the costs of defending potentially covered third party claims against its insureds. The Supreme Court reasoned that Hartford’s defense obligation was not unlimited, but rather restricted to reasonable and necessary defense expenses, not Squire Sanders’ alleged overcharges: “Hartford did not accept a bargain binding it to absorb whatever defense fees and expenses the insureds’ independent counsel might choose to bill, no matter how excessive.”

The Supreme Court also rejected Squire Sanders’ argument that Cumis counsel’s independence, zeal, and undivided loyalty to its client would be compromised if it had to defend an insurer’s lawsuit challenging the reasonableness of its efforts in hindsight. The Supreme Court reasoned that attorneys in numerous settings know they will later have to justify their fees to a third party, and in fact, Civil Code section 2860 addresses the possibility of Cumis fee disputes potentially involving Cumis counsel itself, not just the insured. There is no threat to Cumis counsel’s independence by allowing reimbursement under principles of restitution, rather than only permitting the procedures of Civil Code section 2860. The Supreme Court also rejected Squire Sanders’ argument that 2860 provides for a contemporaneous resolution of fee disputes, reasoning that while 2860 does not foreclose contemporaneous resolution, it also does not require it. Further, the trial court’s order specifically provided that Hartford could seek reimbursement after the Marin County case concluded.

Squire Sanders’ argument that the insureds have the sole responsibility and authority to monitor counsel’s expenditure was rejected by the Supreme Court as creating a circuitous, complex, and expensive procedure. The Supreme Court refused to hold that “any direct liability to Hartford for bill padding by Squire Sanders must fall solely on the insureds.” The Supreme Court also rejected Squire Sanders’ due process argument based on attorney-client privilege, finding that an objective review of the underlying case is unlikely to involve an examination of attorney-client communications, which could be redacted in any event.

The Supreme Court’s decision was guided by the trial court’s order, drafted by Squire Sanders, requiring Hartford to pay for independent counsel and permitting a reimbursement action after the Marin County action concluded. The Supreme Court did not decide whether Hartford as a breaching insurer can pursue anyone for reimbursement of fees because that issue was addressed in the trial court’s order and not before the Supreme Court. The Supreme Court noted that Squire Sanders’ own conduct supports the ruling, as it drafted the initial order. The Supreme Court concluded that allowing Hartford to pursue a narrow claim for reimbursement against Squire Sanders under the terms of the 2006 enforcement order neither rewards an undeserving insurer nor penalizes unsuspecting Cumis counsel.

Concurring Opinion

In a concurring opinion, Justice Liu observed that none of the parties appeared blameless, including Hartford’s insured, J.R. Marketing, which was not “a helpless bystander.” Because the majority opinion relies on dual assumptions that (1) Squire Sanders’ billings were objectively unreasonable and unnecessary and (2) were not incurred for the benefit of the insured, Justice Liu reasoned that the majority opinion leaves open the possibility that some portion of the Squire Sanders fees were incurred for the benefit of J.R. Marketing. On remand, Justice Liu posited that Hartford bears the burden to show that Squire Sanders’ fees were objectively unreasonable and were not for the benefit of J.R. Marketing. To the extent the fees were unreasonable, but incurred for the benefit of J.R. Marketing, Hartford’s reimbursement action should lie against J.R. Marketing. Justice Lui concluded that Hartford should have to overcome a presumption that the fees were incurred for the benefit of J.R. Marketing because J.R. Marketing controlled the defense.

Insurer’s Reasonable Handling of Competing Claims on Policy Limits Sinks Bad Faith Claim

Monday, June 29th, 2015

By Timothy Kevane, Sedgwick New York

In Purscell v. TICO Insurance Co., the U.S. Court of Appeals for the Eighth Circuit held that an insurer’s unsuccessful attempt to resolve multiple personal injury claims exceeding the policy limits did not constitute bad faith.  2015 WL 3855253 (8th Cir. June 22, 2015).

The case arises out of an automobile collision.  The insured’s passenger – distraught, inebriated and suicidal due to a recent drunk driving incident that killed a friend of hers – commandeered the insured’s vehicle by slamming her foot on the accelerator.  The car entered an intersection at 75 m.p.h when it collided into another vehicle, injuring its two occupants.  The insured’s passenger died as a result of the crash.  The insured’s liability policy afforded limits of $25,000 per person and $50,000 per accident for bodily injury.  The insurer, Infinity, immediately put the full $50,000 per accident policy limits on reserve, designating $25,000 for the fatality and $25,000 for the other vehicle’s occupants (the Carrs).

Shortly after the accident, Infinity received a policy limits demand from the Carrs.  Although aware that Mr. Carr’s medical expenses were substantial, Infinity advised it needed to complete its investigation of the claim, including with respect to coverage issues, and kept its insured apprised of the investigation.  In response, the Carrs withdrew their offer.  Infinity responded by assuring that liability was not being denied, but in view of the potential fatality claim, the policy limits would have to be allocated.  After the fatality claim became certain, the Carrs filed their own lawsuit.

Infinity requested updates from the attorneys for the Carrs and the fatality claimants about how to split the policy proceeds.  The insured demanded that Infinity settle the Carrs’ claim within limits, but made no mention of the fatality claimants, who later made their own policy-limits settlement demand.  Infinity later clarified to the insured that the parents of the deceased passenger were also making a claim, and that all claimants were negotiating how to divide the policy limits.  The insured did not respond.  Infinity eventually filed an interpleader action, after having tried unsuccessfully to obtain input from the insured as to a viable settlement approach.  A jury subsequently awarded Mr. Carr $830,000 and Mrs. Carr $75,000 in damages.  The fatality claim was settled for about $7,000.

The insured sued Infinity for bad faith, claiming that it failed to focus on the one claim (by one of the Carrs) with the highest exposure.  To prove that claim, he had to show that Infinity: (1) reserved the exclusive right to contest or settle any claims; (2) prohibited him from settling claims without its consent; and (3) refused in bad faith to settle a claim within policy limits.  The evidence had to show the insurer intentionally disregarded the insured’s best interests when it had a reasonable opportunity to settle within policy limits.

The Court found no bad faith by Infinity in trying to settle all three claims globally, given that it never denied responsibility to pay the full limits.  When a global settlement became unattainable, the insurer appropriately filed the interpleader action.  Furthermore, the insurer never had a reasonable opportunity to settle the Carrs’ claim because it was unexpectedly withdrawn shortly after being made.  The Court also took note of the insured’s disregard of the insurer’s inquiry about the fatality claim, when he asked it to settle the Carrs’ claim only.  The Court concluded that “no reasonable jury” could find that Infinity acted in bad faith in seeking a global settlement of all three claims.

Significant Structural Decision — Washington Supreme Court Adopts a Broad Interpretation of “Collapse”

Tuesday, June 23rd, 2015

By Joel Morgan, Sedgwick San Francisco

In an En Banc decision published yesterday, the Washington Supreme Court in Queen Anne Park Homeowners Ass’n v. State Farm Fire and Cas. Co., Case No. 90651-3 (June 18, 2015), broadly interpreted the term “collapse” to mean “substantial impairment of structural integrity.”  The decision was made in response to the following certified question from the Ninth Circuit Court of Appeals:

What does “collapse” mean under Washington law in an insurance policy that insures “accidental direct physical loss involving collapse,” subject to the policy’s terms, conditions, exclusions, and other provisions, but does not define “collapse,” except to state that “collapse does not include settling, cracking, shrinking, bulging or expansion?

State Farm Fire and Casualty Company (“State Farm”) issued a property liability policy to plaintiff Queen Anne Park Homeowners Association (“the HOA”).  The HOA sued State Farm after the insurer denied HOA’s claim that its two-building condominium had collapsed.  The HOA supported its claim with an engineer report that found hidden decay in the condominium’s walls which had substantially impaired the walls’ ability to resist loads.  State Farm, on the other hand, asserted that the building had not collapsed.

Prior to this decision, Washington courts were split as to the meaning of the term “collapse.”  Some lower courts strictly defined “collapse” to require an actual collapse (i.e. the structure has to break down or come apart in order to collapse).  Other courts interpreted “collapse” to include structures exhibiting imminent collapse and/or substantial structural impairment.  The Washington Supreme Court itself declined to address the issue in Sprague v. Safeco Ins. Co. of American, 276 P.3d 1270 (Wash. 2012).  There, in a 5-4 split decision, two justices filed a concurring opinion applying the following dictionary definition of “collapse”: “to break down completely: fall apart in confused disorganization: crumble into insignificance or nothingness…fall into a jumbled or flattened mass.”  Four dissenting justices felt that the Washington Supreme Court should adopt the more liberal “substantial impairment of structural integrity” standard.

Citing the division of the Washington Supreme Court and courts across the country, the court in Queen Anne Park HOA determined that the undefined term “collapse” was ambiguous because it was susceptible to more than one reasonable interpretation.  Thus, the court agreed that “collapse” should mean “substantial impairment of structural integrity” because it was reasonable and most favorable to the insured.  “Substantial impairment of structural integrity,” the court explained, “means the substantial impairment of the structural integrity of all or part of a building that renders all or part of the building unfit for its function or unsafe….”  However, under the restrictions in the State Farm policy, the court cautioned that “collapse” must mean more than mere settling, cracking, shrinkage, bulging, or expansion.

Until the term “collapse” is defined, insurers should expect more claims in Washington under policies affording coverage for losses to property involving collapse.

Special Licenses Would Stall the Ascent of Self-Driving Cars

Monday, June 22nd, 2015

By Hilary Rowen, Sedgwick San Francisco

I will be a guinea pig. Shortly, I will be sitting in a simulator at the Stanford University Center for Design Research generating data on how ordinary drivers respond when required to take control of a self-driving car.

Most of us are fairly good at keeping our attention on the road while we are actively driving. (Although when our attention strays, the chance of being in an accident increases.) As cars increasingly drive themselves, drivers will be able to take their eyes off the road, but will need to retake control of the vehicle on occasion. Most of us are likely to find these rare occasions somewhat challenging.

As self-driving cars move closer to “deployment” – i.e., sales to the general public – the question has arisen whether a special license, by analogy to separate license requirements for motorcycles or trucks, should be required for the operator of a self-driving car.

Classifying Self-Driving Cars

First, we need to take a short detour into the classification of self-driving cars. Two systems for classifying the level of autonomous driving functions are in current use. In 2013, the National Highway Transportation and Safety Administration issued a four-level classification system; in the same year, SAE International, a professional organization of automotive and aerospace engineers, issued a five-level system.

The NHTSA and SAE classification systems are quite similar. Level 1 in both the NHTSA and SAE classifications refers to stand-alone driver assistance features, such as automatic braking. Both the NHTSA and SAE systems also include a Level Zero, where there is no automation. Level 2 in both systems refers to partial automation. The vehicle performs significant vehicle control functions, such as distance maintenance and lane maintenance. Level 2 cars can be operated in “hands free” and “foot free” mode, at least in some driving environments, but require that the driver remain alert and actively monitor the driving environment. A wide range of cars that qualify as Level 2 will be on the market in the couple of years.

Under both the NHTSA and SAE classifications, Level 3 cars delegate all driving functions to the vehicle. Level 3 car retain steering wheels and brake pedals, and will signal the driver when driving conditions require the driver to retake control. An alert could sound because of a change in driving conditions – such as heavy rain – that reduced the quality of the sensor data below the level required for autonomous operation or because the vehicle entered a geographic area where autonomous operation was not authorized.

A number of manufacturers and technology company – most notably Google – are testing prototypes of Level 3 cars. There are various estimates regarding when Level 3 cars will be on the market; it is likely that a number of auto manufacturers will offer Level 3 cars within a decade.

NHTSA has a single classification, Level 4, for vehicles that dispense with operator controls for steering and braking. SAE bifurcates this category into two subsets: SAE Level 4 vehicles cannot operate in all conditions and all geographic locations. Prototype SAE Level 4 cars are currently being tested. It is quite possible that some Level 4 autonomous vehicles will be deployed on a limited basis within the next five years. Such deployment will likely involve low maximum speeds (in the range of 25 to 35 miles an hour) and very limited geographic travel zones. Due to these limitations, the initial deployment of Level 4 cars is likely to be as people-mover fleet vehicles.

SAE Level 5 can operate anywhere, any time; including driving situations that would be challenging to a human driver. SAE Level 5 vehicles are still in the speculative vision stage. The sheer versatility of a human driver is hard to match, even though the current technology can easily exceed our reaction time and does not have blind spots and other deficiencies of human drivers.

Special Licenses for Level 3?

Level 3 vehicles offered for sale to the public will have a lower incidence of accidents – and quite likely will produce less severe bodily injuries in the event of an accident – compared with conventional cars. The relative incidence of accidents in Level 2 and Level 3 cars is more difficult to predict, but it is likely that less competent drivers will pose a lower aggregate risk in Level 3 cars.

Nevertheless, Level 3 vehicles pose particular challenges to drivers in the event of a transition from autonomous to driver-controlled operation. Under the NHTSA definition, Level 3 cars will be required to provide the driver “with an appropriate amount of transition time to safely regain manual control.” Even with alerts, some drivers will fail to take control timely and cause accidents. With Level 3 cars, there will be some high risk miles, even though Level 3 cars on average will generate fewer accidents per mile traveled.

The ability to respond quickly when the mind is engaged in an activity unrelated to driving – texting, reading, talking on the phone, watching a movie – will affect a given driver’s chance of being involved in an accident when signaled to re-take control of a Level 3 car. The existence of high risk miles and the varying ability of drivers to respond has led to suggestions that operators of Level 3 cars be required to hold a separate driver’s license.

This would be a bad idea. As a matter of public policy, higher risk drivers should not be deterred from purchasing and operating autonomous vehicles. The people who are likely to have the poorest response times (and worst judgment) when faced with the sudden need to take control of a Level 3 car are also likely to pose the highest risk when behind the wheel of a conventional car. From a public safety perspective, we want teenagers, the very elderly, and people who simply are not very competent drivers – but hold driver licenses – to be in Level 3 vehicles.

Imposing special drivers’ license requirements for Level 3 cars – similar to the separate license required to operate a motorcycle – will inhibit the introduction of Level 3 cars. Less competent drivers might not pass a separate autonomous vehicle test; but would continue to drive. Many drivers who could easily pass an autonomous vehicle driving test would be deterred from buying a Level 3 car by the need to get a new license. As a result, the potential for accident reduction offered by Level 3 cars would not materialize.

The hypothetical autonomous vehicle driving test might be very similar to sitting in the simulator at Stanford. Hopefully, this experience will not become a prerequisite for Level 3 car purchasers.

This article was originally published in the Daily Journal on July 19, 2015.

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