Archive for the ‘Insurance Practices’ Category

UK Supreme Court Modifies “Fraudulent Claims Rule”

Wednesday, July 27th, 2016

By: Neil Thomson, Sedgwick Chudleigh, Bermuda

The UK Supreme Court has ruled that “collateral lies” made in the context of an insurance claim will not necessarily void coverage. Previously English courts had held that an insurer could avoid paying a claim in its entirety where the insured had acted dishonestly in connection with the making of the claim. This “fraudulent claims rule” was applied to discourage insureds from dishonesty, fraud, and embellishment in making claims.

Versloot Dredging BV and anr (Appellants) v HDI Gerling Industrie Versicherung AG and ors (Respondents) [2016] UKSC 45 involved a loss arising from flood damage to the engine room of a cargo ship during a storm. In submitting their claim to insurers, the owners lied, claiming the crew could not respond to a flood alarm due to the weather conditions. The judge at first instance held that, although the insured’s lie was irrelevant (as the loss was otherwise covered), because the lie was a “fraudulent device” the entire claim was invalidated. This decision subsequently was upheld by the Court of Appeal.

By a majority, the Supreme Court found in favor of the insured on the basis that its fraud was, on the facts, immaterial to its right to recover. The Supreme Court ruled that “collateral lies” are an exception to the fraudulent claims rule and should not preclude the insured from an indemnity to the extent that it suffered a true, insured loss, but not of course for any fabricated loss. In other words, the claim would have been payable regardless of whether the insured lied, and accordingly neither party has gained or lost anything as a result.

Lord Sumption set out the test as follows:

… although a lie uttered in support of a claim need not have any adverse impact on the insurer, I consider that it must at least go to the recoverability of the claim on the true facts. By that test, the fraudulent claims rule applies to a wholly fabricated claim. It applies to an exaggerated claim. It applies even to the genuine part of an exaggerated claim if the whole is to be regarded as a single claim, as it must be. But it does not apply to a lie which the true facts, once admitted or ascertained, show to have been immaterial to the insured’s right to recover. [emphasis added]

The Court was careful to distinguish between fraud occurring during the formation of the policy and fraud occurring during the claims process. In the former setting, dishonest disclosure will directly affect the insurer’s ability to properly underwrite the risk, and will allow an insurer to completely avoid the contract (but note the imminent changes to this principle under the UK Insurance Act 2015). In the latter setting, however, the insurer already has assumed the risk and, if that risk eventuates (even with some embellishment), it is in no worse position than if the embellishment had not occurred.

Section 12 of the Insurance Act 2015 (which comes into force on 12 August 2016) provides that an insurer is not required to pay a fraudulent claim.  However, “fraudulent claim” is not defined, and there is no distinction between a completely fraudulent claim and a collateral lie. Versloot, accordingly, has provided guidance on this issue and has made it clear that there must be proportionality in the remedies available to an insurer in response to collateral lies. This approach is generally consistent with the approach found elsewhere in the Insurance Act 2015, in particular the proportionate remedies for non-disclosure (in contrast to the current position where even minimal non-disclosure may allow an insurer to completely avoid a contract).

Friendly Societies in Bermuda: Driving Without Insurance?

Wednesday, June 22nd, 2016

By: Alex Potts and Caitlin Conyers, Sedgwick Chudleigh, Bermuda

Friendly Societies in Bermuda have their origins in Britain’s industrial revolution in the 18th and 19th centuries, when mutual self-help organizations were first established to provide affordable welfare benefits and financial assistance to their members, including unemployment benefits, health insurance, pension benefits, and funeral expenses.

Although Friendly Societies may still have a role to play in 21st century Bermuda, the Supreme Court of Bermuda recently ruled that their role does not stretch so far as the unregulated provision of liability insurance for third-party motor risks, on a true interpretation of section 1 of Bermuda’s Friendly Societies Act 1868 and section 57(1)(a) of Bermuda’s Insurance Act 1978, and taking into account Bermuda’s status as a “financially sophisticated” insurance/reinsurance market.

In his recent judgment in the case of Bentley Friendly Society v Director of Transport Control Department [2016] SC (Bda) 65 Civ, dated 15 June 2016, Mr. Justice Hellman held that the provision by a Friendly Society of motor vehicle insurance with respect to third-party motor liability risks is “insurance business” within the meaning of the Motor Car Insurance (Third-Party Risks) Act 1943 and, therefore, it must be authorized by the Governor of Bermuda in compliance with that Act.

In the Judge’s view, it would be for the Governor of Bermuda — when determining whether or not to grant approval — to consider public policy matters such as whether a Friendly Society would be able to satisfy any reasonably foreseeable third-party claims, and whether the interests of third parties would be adequately protected.  The Court noted, however, that the Bentley Friendly Society had not produced any audited financial statements (making it difficult for the Governor of Bermuda to assess its ability to satisfy third-party claims), and that it had not yet been authorized to conduct insurance business by the Governor.  The Court also pointed out that any person who conducts “insurance business” without proper authorization commits an offence.

The Court’s judgment upheld the position taken by the Government of Bermuda in April 2014, that approximately 50 motor insurance policies issued by the Bentley Friendly Society were legally invalid, as the Governor of Bermuda had not authorized the plaintiff to undertake such insurance business when the liability policies were issued.

The Bermuda Monetary Authority previously had recommended a repeal of section 57(1)(a) of the Insurance Act 1978 by its Consultation Papers dated June 2014 and October 2014, with a view to bringing Friendly Society insurance business into the regulatory, prudential, and legislative framework set out in the Insurance Act 1978, and under the supervision of the Bermuda Monetary Authority.  The Bermuda Monetary Authority’s proposed amendments have not yet been enacted, although the Court’s judgment has highlighted the need for regulatory reform in this area.  The Court noted, however, that different standards of regulatory oversight might apply to Friendly Societies with respect to first-party risks because, unlike third parties, “the members have the opportunity to inform themselves … and take an informed decision.”

For Real: The Second Circuit Says No Coverage for Purveyors of Fake Goods

Thursday, June 9th, 2016

By Timothy D. Kevane, Sedgwick New York

The U.S. Court of Appeals for the Second Circuit recently held that there is no “advertising injury” coverage for claims against insureds caught selling counterfeit goods.  United States Fidelity and Guaranty Co. v. Fendi Adele S.R.L., — F.3d. —, 2016 WL 2865578 (Second Circuit, May 17, 2016).

Claims arising from the sale of counterfeit products, typically fakes of high-end brands, have at times triggered coverage under the advertising injury provisions of a general liability policy, citing provisions that extend coverage for copyright and/or trade dress infringement in the insured’s advertising.  But the scope of this coverage has its limits, and the insured in Fendi pushed the envelope (or the handbag, as it were) too far in this instance.  It sold counterfeit products that displayed Fendi trademarks and otherwise mimicked the appearance of genuine Fendi products.  That did not sit well with the Italian luxury fashion giant, which sued the insured for trademark counterfeiting, false designation of origin, trademark dilution and unfair competition.  The policy’s advertising injury coverage extended to the use of another’s advertising idea in advertising, as well as infringement of another’s copyright, trade dress or slogan “in your advertising.”  Critically, the Court found that the insured did not engage in any advertising of the counterfeit goods nor did Fendi allege any such advertising.  The Court stressed that Fendi was awarded $35 million in damages based on the sales – not advertising – of the fake goods.

The court rejected the insured’s argument that the use of the Fendi mark constituted “advertising,” which the policy defined as attracting the attention of others for the purpose of seeking customers.  Under no reasonable reading of the policy would coverage have been expected for the mere sale of counterfeit goods.  The Court opined that “common sense” draws a difference between using a counterfeit mark on the fake product versus soliciting customers through printed advertisements or other media.  Thus, the insured’s use of the Fendi logo was merely to identify the product, not an advertisement in and of itself.  Furthermore, having profited from the sale of knock-offs, the insured could not have reasonably expected any insurance for the return of its ill-gotten gains pursuant to well-settled New York law prohibiting such coverage.

The case is an important reminder that the courts will enforce a basic requirement for advertising injury coverage – that the infringing conduct must occur in the course of “advertising.”  Thus, the bare allegation of a copyright or trade dress infringement, especially in lawsuits centering on the sale of fake goods, will not suffice to trigger coverage.

New York’s Court of Appeals Holds that Anti-Stacking Provision Justifies “All Sums” Allocation to Continuous Injury Claims

Tuesday, May 3rd, 2016

By Timothy D. Kevane, Sedgwick New York

In a landmark decision, the New York Court of Appeals broke with its prior precedent adopting a “pro rata” allocation among general liability policies for continuous injury claims, and held that where the policy contains an anti-stacking or similar provision, an “all sums” approach will apply. Viking Pump, Inc. v. TIG Insurance Co., — N.Y.3d –, 2016 WL 1735790 (N.Y. May 3, 2016).

The case involved claims arising from longterm exposure to asbestos from the insured’s pump manufacturing business. The question was how to allocate the indemnity obligation among successive policies, which obligated the insurers to pay “all sums” because of bodily injury occurring during the policy period.  Pursuant to the Court’s prior opinion in Consolidated Edison Co. of N.Y. v. Allstate Ins. Co., 98 N.Y.2d 208 (2002), the pro rata method of allocation was applied to claims involving environmental contamination over a number of years and policy periods based on two key provisions in the policy: (i) the agreement to indemnify the insured for “all sums” for which the insured was liable arising out of an occurrence; and (ii) indemnification applied to liability incurred as a result of an occurrence “during the policy period” only.  The all sums method of allocation permits the insured to recover its total liability under any policy in effect when the damage occurred, whereas the pro rata approach adopted by the Court in Consolidated Edison limits the insurer’s liability to sums incurred by the insured during the policy period.

The Court held that the pro rata allocation it endorsed in Consolidated Edison did not apply here since the policies contained non-cumulation (anti-stacking) or similar “prior insurance” provisions. These provisions adjust the policy’s limit if the insurer made any payment for the same injury under a prior policy concerning the same incident, thus preventing the insured from “stacking” the limits of consecutive policies.  According to the Court, these provisions made the policies at issue “substantively distinguishable” from those in Consolidated Edison, which contemplated that different policy wording might compel an all sums allocation (some of the policies in Consolidated Edison in fact did contain anti-stacking provisions, but the decision made no reference to them).  The Court found that these provisions undermined the very premise upon which pro rata allocation is based.  If the intent had always been to allocate damages based on policy periods, the anti-stacking provisions would be rendered superfluous.  Since contractual interpretation principles would prohibit such a result, the only reconciliation was to adopt an all sums approach to the insuring clause.  In reaching its decision, the Court suggested that the Second Circuit’s recent application of a pro rata approach for policies containing anti-stacking provisions in Olin Corp. v. Amer. Home Assur. Co., 704 F.3d 89 (2nd Cir. 2012) may have relied on an unduly narrow interpretation of Consolidated Edison.  Given that the weight of authority has favored pro rata allocation over all sums, and that other courts have followed New York’s lead, it remains to be seen how these pro rata jurisdictions respond to Viking Pump.

Finally, the Court held that the insured would only be required to vertically exhaust its coverage, thus allowing it to access each excess policy once the immediately underlying policies’ limits are exhausted – even if other underlying policies during different policy periods are not exhausted. The Court found this approach more consistent given the language tying attachment of the excess policies to policies that cover the same policy period and the adoption of the all sums approach.

Setting the Standard: Ontario Court Enforces Hybrid Arbitration Agreement in Favour of Bermudian P&I Club

Wednesday, February 17th, 2016

By Alex J. Potts, Sedgwick-Chudleigh Bermuda

In the recent decision of T. F. Warren Group Inc and Vanguard Shipping (Great Lakes) Ltd v The Standard Steamship Owners’ Protection and Indemnity Association (Bermuda) Limited [2015] ONSC 7778, the Ontario Superior Court of Justice granted a stay of court proceedings under Ontario’s International Commercial Arbitrations Act 1990, in order to enforce a hybrid London arbitration agreement between two insureds and The Standard Club, a Bermudian Protection & Indemnity Association (‘the P&I Club’).

The liability insurance claims asserted in the proceedings related to a maritime incident that occurred in 2011, when a ship collided with a railway bridge on the Maumee River in Ohio. As the Court noted in passing: “the bridge was very likely minding its own business.

Section 25 of the P&I Club’s Defence Rules imposed conditions that arguably could be read as giving the P&I Club unilateral discretion to delay the submission of any dispute to arbitration. In particular, section 25 provided that:

  1. The insured party had to submit the dispute to the P&I Club;
  2. No insured party was entitled to maintain any legal proceedings against the P&I Club unless and until the matter had been submitted to the P&I Club for decision;
  3. The parties then would engage in mandatory mediation (in London); and
  4. If the matter was not settled by mandatory mediation within 14 days, “the dispute shall be referred to and finally resolved by arbitration in London,” subject to the UK’s Arbitration Act 1996.

The Court noted that the P&I Club sat on the insured’s claim for a year.  The Court observed that, “the entire premise of granting a stay under the ICAA is that the party whose action is stayed is not denied access to justice but is gently but firmly directed to the correct door to obtain it.

To mitigate against the risk of further delays, the Court ordered an interim stay of the proceedings, which would then become a permanent stay if all conditions precedent to commencement of arbitration proceedings had been waived or completed within a reasonable period of time.

Although this decision should give comfort to the various P&I Clubs that are incorporated in Bermuda and in the UK that the Canadian Courts will enforce London and Bermuda arbitration agreements, it also illustrates the importance of careful drafting of such clauses, so that they can be easily understood, performed, and enforced.

New Jersey Supreme Court Affirms Viability of Late Notice Defense Under Claims-Made Policies

Friday, February 12th, 2016

By William Brennan, Sedgwick New York

In a decision released yesterday, the New Jersey Supreme Court held that an insurer could deny coverage under a claims-made directors and officers policy based on the insured’s late notice, without any evidence of prejudice to the insurer.

In Templo Fuente De Vida Corp., et al. v. National Union Fire Insurance Co., ___ A.3d ___, 2016 WL 529602 (N.J. Feb. 11, 2016), the underlying plaintiffs brought a number of claims against First Independent Financial Group. (“First Independent”) in the wake of a failed real estate deal for which First Independent had promised to provide funding, only to come up empty when the closing date rolled around.  First Financial’s D&O policy with National Union required it to provide notice of claims “as soon as practicable” and within the policy period.  Yet First Financial did not notify National Union of this claim until six months after it had been served, and after it had retained counsel and filed an answer.  National Union promptly disclaimed on grounds of late notice.  In the ensuing coverage litigation brought by the underlying plaintiffs, to whom First Financial assigned its insurance claim, the trial court granted National Union summary judgment on the basis of the late notice defense, brushing aside the plaintiffs’ arguments that National Union should be required to demonstrate prejudice arising from the late notice.  After an affirmance by the New Jersey Appellate Division, the issue arrived at the Supreme Court.

The New Jersey Supreme Court acknowledged that New Jersey does require insurers to show prejudice in order to make out a late notice defense, but noted that this principle applied only to occurrence policies.  The Court emphasized that it approached occurrence and claims-made policies differently due to its belief that the “vast majority” of policyholders with occurrence policies were unsophisticated consumers buying adhesion contracts, while claims-made policyholders, especially for D&O policyholders like First Independent, were sophisticated insureds advised by sophisticated brokers.  Given this background, the Court found that the National Union policy at issue, including its notice requirement, “sufficiently conformed to the objectively reasonable expectations of the insured, and, hence, did not violate the public policy of New Jersey.”  It therefore enforced the prompt notice requirement as written, without imposing a further “prejudice” requirement.

Staying Current on Emerging and Complex Insurance Claims

Friday, February 12th, 2016

In the ever changing legal environment, staying current on complex coverage issues is critical. The upcoming Emerging and Complex Insurance Claims Forum will provide in-house counsel, outside counsel, and policyholder professionals updates on the latest hot topics.

The topics to be covered include: legalized marijuana, drones, cyber liability, social media, product liability claims, additional insured’s, construction claims, SIRs, ADR and additional topics as they hit the news. This event also offers an extended session on allocation, run by the experts who live it every day. This is an opportunity to learn from leading coverage attorneys, litigators, mediators, technology experts, international business experts, and in-house professionals from insurance companies.

The Forum is sponsored by HB Litigation Conference and will be held in Los Angeles on February 25-26, 2016, at the Los Angeles Athletic Club. Laurie Kamaiko, a partner in the firm’s Cybersecurity & Privacy Group and a member of its Insurance Division, will be a panelist on “Cyber Liability Coverage: You say Yes, I Say No.”

HB Litigation Conferences is a premier provider of Insurance, Mass Torts, Construction, and Professional Development conferences, content and networking. Complete details for this insurance forum can be found at http://litigationconferences.com/insurance-allocation-complex-claims-2016/

HB has made this conference complimentary to in-house counsel. Others may save $200 using promotion code SEDGWICK.

Privy Council Enforces Arbitration Agreement: When “May” Means “Must”

Friday, January 29th, 2016

By Alex J. Potts, Sedgwick-Chudleigh Bermuda

The Privy Council has handed down its judgment in Anzen Limited v Hermes One Limited [2016] UKPC 1, a case concerning enforcement of an arbitration agreement. The judgment can be found at http://www.bailii.org/uk/cases/UKPC/2016/1.html. The appeal came from the Eastern Caribbean (BVI) Courts, but the decision is of significance for all arbitration-friendly offshore jurisdictions whose final right of appeal lies with the Privy Council, including Bermuda and the Cayman Islands.

The main issue on the appeal was the proper interpretation of an arbitration clause in a BVI company’s shareholders’ agreement which provided that, in the event of an unresolved dispute, “any party may submit the dispute to binding arbitration.” The arbitration agreement was subject to English law, and any arbitration was intended to be subject to ICC arbitration rules and the English Court’s supervisory jurisdiction.

It was concluded both at first instance and in the BVI Court of Appeal that the use of the word “may” effectively resulted in the arbitration clause being non-exclusive, permissive and optional, rather than mandatory; and that, unless and until a party actually had exercised its arbitration option by commencing an ICC arbitration with respect to a dispute, there was no basis for the BVI Court to stay any Court proceedings.

The Privy Council disagreed. Although it did not accept that the arbitration clause was mandatory in all circumstances, it concluded that it was mandatory in the event that either party unequivocally insisted on there being an arbitration of any unresolved disputes (even if that party was not minded to commence arbitration itself, but simply waited until the other party did so).

The decision is to be welcomed as yet another example of the Court’s willingness to uphold and enforce arbitration agreements in arbitration-friendly jurisdictions such as Bermuda, the BVI, and the Cayman Islands.

However, the decision also illustrates, quite starkly, the importance of careful drafting of any arbitration agreement or jurisdiction agreement. Had the parties and their lawyers clearly used the word “shall” rather than the word “may” in the arbitration clause, they might have avoided the time and costs associated with over two years of litigation and two appeals.

Washington Supreme Court Broadly Interprets “Arising Out Of” for Purposes of UIM Claims

Monday, January 25th, 2016

By Eliot Harris, Sedgwick Seattle

On January 14, 2016, the Washington State Supreme Court rendered an important decision on when an injury “arises out of” the use of a vehicle for the purpose of uninsured motorist (“UIM”) coverage.

In Kroeber v. GEICO Insurance Co., a woman was shot outside a bar by the driver of an uninsured vehicle, and sought UIM coverage from her automobile insurer. The woman’s insurer, GEICO, provided coverage for damages that the insured was legally entitled to recover from the owner or operator of an uninsured motor vehicle due to bodily injury sustained and caused by an accident, provided that the liability of the owner or operator of an uninsured motor vehicle arises out of the ownership, maintenance or use of the uninsured motor vehicle. GEICO denied the claim because the woman’s injuries did not arise out of the use of the uninsured motorist’s truck, and she sued for coverage.

Prior Washington courts had found that the phrase “arising out of” in a UIM policy does not mean proximate cause, but indicates a lesser standard of causation having some relationship to or connection with the use, maintenance or ownership of the uninsured vehicle. The Kroeber court concluded that existing case law did not establish that the vehicle or an attachment to it need be the direct cause of the injury, but that the injury must have a causal relationship to the condition of the vehicle, a permanent attachment thereto, or some aspect of its operation. Thus, the court found, the phrase “arising out of” should be broadly construed to mean a mere causal connection between the injury and the use of the vehicle. The court distinguished situations where the vehicle serves as the “mere situs” of the accident, and noted that the distinction and determination for when the use of a vehicle causes the injury versus when it is the mere situs of the injury is a factual determination to be made by the trial court.

Kroeber is significant because it opens the potential for UIM coverage for injuries that are not directly caused by the vehicle, but are the independent actions of the operator of the vehicle at the time of the incident.

Sedgwick Supports ACCEC Insurance Law Symposium

Friday, January 8th, 2016

The American College of Coverage and Extracontractual Counsel (ACCEC) is hosting an Insurance Law Symposium on January 22, 2016, at Boston College Law School, in Newton, Massachusetts. Our partner Bruce Celebrezze is Secretary-Treasurer of the ACCEC.

The symposium is designed to enhance and further the dialogue on the issues facing today’s insurance industry by bringing together insurance professionals and regulatory authorities to share insights.  Topics range from intellectual property disputes and D&O liability to cybersecurity and data breach claims. The Hon. Herbert Wilkins (ALI Council member and former Chief Justice, Supreme Judicial Court of Massachusetts) will speak on A Chief Justice’s Perspective on Restatements and the Law.

Established in 2012, the ACCEC brings together pre-eminent lawyers representing the interests of both insurers and policyholders to improve the quality of the practice of insurance law and to increase civility and professionalism in its field. Its 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. Through its Board of Regents and its working committees, the College engages in a wide variety of activities designed to promote those goals, in addition to improving the civility and the quality of the practice of insurance law.

The registration deadline is Friday, January 15. Space is limited and available on a first-come, first-served basis. For more details, click here.

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