General – Page 5 – Duane Morris Insurance Law

On Wednesday, French Laundry and Bouchon Bistro, two high-end Michelin star Napa Valley restaurants, filed the first California coverage suit for COVID-19-related losses including lost business income. Plaintiffs, represented by the same firm that filed the first COVID-19 coverage lawsuit in New Orleans two weeks ago, allege that the Napa County stay-at-home order related to COVID-19 caused them to lose business and furlough over 300 employees.

Plaintiffs allege they carry a property, business personal property, business income and extra expense policy issued by Hartford Fire Insurance Company. Plaintiffs allege that the policy’s “Civil Authority” insuring agreement entitles them to “the actual loss of business income sustained and the legal, necessary and reasonable extra expenses incurred” due to the Civil Authority’s order prohibiting access to the businesses. The “Civil Authority” is the Napa County Health Officer, Karen Relucio, a named defendant who is alleged to have issued the stay at home order. Like many similar orders around the state, the order restricts restaurant services to take out and delivery.

It is important to note that the policyholders in this case allege that the policy contains a Property Choice Deluxe Form that specifically extends coverage to direct physical loss or damage caused by virus. The policyholders do not cite the specific policy language at issue and are not seeking any determination in their suit that their facilities are directly damaged by the virus.

Duane Morris’ insurance and reinsurance group continues to monitor COVID-19-related events.

March 24, 2020 by Daniel B. Heidtke

Statutes Compelling Coronavirus Business Interruption Insurance Should Face Constitutional Constraints

We previously wrote about the growing likelihood that insurance companies would face claims for business interruption and contingent business interruption insurance claims as their insureds looked to cope with the broad effects of the novel coronavirus outbreak and response. Heating Up: New Orleans-Based Oceana Grill Seeks Insurance Coverage for Coronavirus-Caused Business Interruption. Now, state and federal governments are beginning to consider ways that they might compel such coverage.

Last week, members of the federal government wrote to insurance industry leaders urging them to expand commercial business interruption coverage for COVID-19 losses. In response, the insurance industry leaders replied, “Standard commercial insurance policies offer coverage and protection against a wide range of risks and threats and are vetted and approved by state regulators. Business interruption policies do not, and were not designed to, provide coverage against communicable diseases such as COVID-19.” Continue reading “Statutes Compelling Coronavirus Business Interruption Insurance Should Face Constitutional Constraints”

March 19, 2020 by Jessica E. La Londe

Life Interrupted: Coronavirus (COVID-19) and Insurance Coverage for Business Interruption

by Max H. Stern and Jessica E. La Londe

A key issue that many insurance companies will face in the upcoming weeks and months is whether their policies provide coverage for policyholders’ business interruption losses from the COVID-19 crisis. This is not merely an academic question: the first coverage case on this issue was filed in Louisiana this week (Cajun Conti, LLC, et al. v. Certain Underwriters at Lloyd’s London, et al.) and legislatures are already considering legislation that may significantly impact the insurance industry (see New Jersey’s proposed legislation on insurance coverage for COVID-19 business interruption claims and letter from members of Congress to insurer trade groups encouraging the acceptance of business interruption coverage for COVID-19 losses).

As in every case, whether there is coverage for these losses will depend, in the first instance, on the policy language, which must be looked at closely. The applicable law and specific facts will add layers of complexity to the issues. Based on our experience with advising on and litigating coverage for business interruption losses, some of the following issues may be in play.

First, insurance companies will have to determine if the policy provides business interruption coverage at all (either in the policy form or by endorsement) and then whether the loss falls within the relevant scope of coverage. This may include, for example, whether the timing of the business interruption loss triggers coverage (often, the business interruption must “commence” during the policy period) and whether the coverage applies when the source of the business interruption is unrelated to the policyholder’s property.

Second, some business interruption coverage may contain exclusions that apply to the losses suffered because of the COVID-19 crisis. For example, in 2006 ISO adopted a “virus” exclusion for business interruption coverage (as a result of previous virus outbreaks, including SARS). Other types of specialty policies may provide coverage that extends business interruption coverage to pollution or biological contamination, but they may be subject to communicable disease exclusions or other limitations.

Third, in our experience, novel business interruption claims need to be closely examined with respect to the nuts of bolts of the requirements for business interruption coverage, such as:

– Issues of proof, such as demonstrating the exact amount of loss over and above expenses, taxes, etc. that would have been incurred;

– Whether business interruption loss applies when there is a complete and total loss (as opposed to a mere “interruption”);

– The point at which true business interruption begins and ends;

– Notice/reporting issues; and

– Deductible/self-insured retention and policy limits issues.

The potential coverage issues in COVID-19 business interruption claims are varied and complex and may benefit from experienced coverage counsel.

For more information, please contact Max Stern (mhstern@duanemorris.com) or Jessica La Londe (jelalonde@duanemorris.com).

March 10, 2020 by Mark A. Bradford

Proposed Illinois Data Transparency and Privacy Act Referred to State Senate Judiciary Committee

On February 27, 2020, the Illinois State Senate referred SB2330, which if enacted would create the Data Transparency and Privacy Act (the “Proposed Act”), to its Judiciary Committee. The Proposed Act would apply to “businesses”, including insurers, intermediaries, and other third-party service providers, who collect or disclose the personal information of 50,000 or more persons, Illinois households, or a combination thereof or who derive 50% or more of their business’s annual revenue from the sale of personal information. As currently drafted, SB2330 may apply to insurers and other affiliates who write a limited number of policies in Illinois but meet the statutory thresholds through business written outside of Illinois. While the Proposed Act contains a carve-out for personal information collected, processed, sold, or disclosed under the Gramm-Leach-Bliley Act, SB2330 may still have applicability to many insurers and reinsurers admitted to write business in Illinois and may also be of particular note to surplus lines carriers from both an enterprise and an underwriting perspective.

Under SB2330, Illinois consumers, including policyholders who meet the statutory definitions, would have several broad rights concerning personal information: (1) the right to transparency, (2) the right to know, and (3) the right to opt out, correct, and delete. SB2330, 101st Gen. Assemb., Reg. Sess., §§15, 20, 25 (Ill. 2020). Businesses who meet the statutory definition would be required to establish a procedure for collecting consumers’ requests and also for authenticating the consumer making each request. Id. at §30(a). The Proposed Act would mandate a response to a consumer’s request within 45 days. Id. at §30(e). Each impacted business would be required to post links on its website and mobile applications for the purpose of processing consumer requests. Id. at §30(b).

A violation of the Proposed Act would be statutorily deemed an unlawful practice under the Consumer Fraud and Deceptive Business Practices Act. Id. at §40(b). Whether such a finding is constitutionally permissible is something which may need to be tested if the Proposed Act is enacted depending upon regulatory guidance and interpretation. The Illinois Attorney General would be tasked with enforcement of the Proposed Act in terms of alleged violations of the Illinois Consumer Fraud and Deceptive Business Practices Act. Id. Consumers would also have a right of action in the event of “an unauthorized access and exfiltration, theft, or disclosure as a result of the business’ violation of the duty to implement and maintain reasonable security procedures and practices . . . .” Id. at §40(a).

As of March 4, 2020, the Proposed Act has not been scheduled for hearing and has only received a single reading, in a single chamber of the General Assembly. The Illinois Constitution mandates that each bill shall be read by title on at least three different days in each house. ILL. CONST. art. IV, §8(d). It is unclear whether the Proposed Act will meet a similar fate as previous data privacy legislation proposed in recent Illinois sessions. As the Proposed Act has an effective date of July 1, 2021, as currently drafted, it is unclear whether data privacy is something that might have legs in the regular session or something that could be resurrected in the veto session following this November’s election. Either way, SB2330 and similar proposed legislation in other States are of note particularly for insurers who write in multiple jurisdictions and may face an obligation to comply with data privacy laws, each with their own nuance, across multiple jurisdictions.

February 13, 2020 by Duane Morris

California Court of Appeal: Third Party, Additional Insured Bound by Policy’s Arbitration Clause

By Daniel B. Heidtke

In an opinion filed on the last day of 2019, the California Court of Appeal, Third District, reversed a trial court’s holding that an additional insured was not bound by an arbitration agreement in an insurance policy. In Philadelphia Indemnity Insurance Company v. SMG Holdings, Inc., Case No. C082841 (certified for publication on January 28, 2020), the court held that an arbitration agreement in a commercial general liability policy (“CGL”) issued by Philadelphia Indemnity Insurance Company (“Philadelphia”) bound SMG Holdings, Inc. (“SMG”), a “third party beneficiary” under the policy that was also “equitably estopped” from avoiding the arbitration clause. The court reversed the trial court, vacated its order denying Philadelphia’s petition to compel arbitration, and directed the trial court to order arbitration of the coverage dispute. Continue reading “California Court of Appeal: Third Party, Additional Insured Bound by Policy’s Arbitration Clause”

February 4, 2020February 5, 2020 by Duane Morris

Paul Killion Elected to the California Academy of Appellate Lawyers

Duane Morris partner Paul J. Killion has been elected to the California Academy of Appellate Lawyers. The CAAL is an election-only organization devoted to excellence in appellate practice, comprised of about 100 of the top appellate lawyers in the state.

August 30, 2019 by Duane Morris

Florida Federal Court recognizes Federal Admiralty Rule of Strict Enforcement of Warranties in Marine Insurance Preempts State Law

We are pleased to present a decision in which we prevailed from the United States District Court for the Southern District of Florida.

The ruling is significant for its holding that the 11th Circuit Court of Appeals [encompassing the US Southeast including Florida] recognizes an established Federal Admiralty rule of law that warranties in marine insurance are to be strictly enforced. The ruling clarifies a number of inconsistent decisions in Florida holding that only navigational limits warranties were entitled to strict enforcement, and that the Florida Anti-Technical statute otherwise applied. The primary distinction is that the strict enforcement of a warranty excuses the policy from responding in the event of a violation independent of a causal relationship between the violation and the claimed loss, whereas many states’ laws, such as Florida’s Anti-Technical Statute, require the insurer to prove a causal relationship between the violation and the claimed loss to deny a claim.

August 15, 2018August 17, 2018 by Duane Morris

Duane Morris’ Thomas Newman Recognized as the NYC Appellate “Lawyer of the Year” by Best Lawyers

Duane Morris’ Thomas Newman has been named by Best Lawyers as the 2019 “Lawyer of the Year” in New York City for Appellate Practice. The recognition is given to only one attorney for each practice area and city. Lawyers are selected based on high marks received during peer-review assessments conducted by Best Lawyers each year. Mr. Newman also received this distinction in 2018 and 2013.

Mr. Newman practices in the areas of insurance and reinsurance law, including coverage, claims handling, contract drafting and arbitration and litigation. In addition to his insurance/reinsurance practice, Mr. Newman has wide experience in appellate practice and has handled hundreds of appeals in both state and federal courts in New York and elsewhere and has argued 80 appeals in the New York Court of Appeals.

He is a member of the American Academy of Appellate Lawyers; a life member of the American Law Institute; a Fellow of the Chartered Institute of Arbitrators; a member of the London Court of International Arbitration; a member of the American College of Coverage and Extracontractual Counsel; a member of ARIAS-U.S.; a member of the Federation of Defense and Corporate Counsel; a Fellow of the New York State Bar Association Foundation; and a member of the New York State Office of Court Administration’s Advisory Committee on Civil Practice.

He is the original author of New York Appellate Practice, co-author of the Handbook on Insurance Coverage Disputes and the author of numerous articles on insurance/reinsurance and appellate practice.

June 1, 2018June 1, 2018 by Duane Morris

Directors Roundtable Program, “Dealing with Corporate Crisis”

Duane Morris partners Christopher Casey and Damon Vocke will present a complimentary Directors Roundtable program, “Dealing with Corporate Crisis,” on Thursday, June 28, 2018, from 8:30 a.m. to 10:30 a.m. at the Deloitte Conference Center in New York City. For more information or to register, please visit the Directors Roundtable website.

May 30, 2018 by Mark A. Bradford

Representations and Warranties Insurance Beyond the Current Cycle of Merger Activity: Will Those Chickens Come Home to Roost?

Representations and warranties insurance transfers the risk of certain known unknowns and unknown unknowns from transaction participants to the underwriting insurer.[1] Such risk transfer can create moral hazard especially where one of the parties to the transaction, i.e. the seller (and also the underwriting broker), receive the majority, if not all, remuneration on the deal and exit the stage before the unknowns become knowns. It also can create a situation where insurers who seek an expanded share of what has been called a “prolonged sellers’ market” may face deteriorating claims and be left with an undesirable position when the economic waters recede.[2]

What is Representations and Warranties Insurance

Representations and warranties insurance provides coverage for financial losses resulting from a breach of a representation or warranty made by a seller in a purchase and sale agreement. It is a subset of transactional risk insurance and sometimes called M&A insurance or warranty and indemnity insurance. Counterparties used to address these type of risks through negotiated escrows which kept the risk allocated among the parties to the transaction. Transactional parties often now lay that risk off to an insurer’s balance sheet.

The Domestic Market Has Grown at an Astronomical Pace

The market for representations and warranties insurance exploded in the past decade. According to one of the major brokers, total industry limits (combined primary and excess) approached $14.7 billion and generated approximately $526.5 million in premium on more than two-thousand issued policies in 2016.[3] That is remarkable growth for a product that reportedly generated $10 billion in bound coverage worldwide in 2013 and was on virtually no one’s radar screen before the recent M&A uptick which followed the Great Recession.

As of 2018, a representations and warranties policy is generally priced between 2.25% to 4% of the limit of liability with market capacity and appetite for large transactions increasing. Typically, 1-3% of enterprise value is retained, but it has been reported that recent retentions have gone below 1% as the market tightens among insurers competing for market share.

Reported Claims Experience

AIG was one of the first insurers to write representations and warranties insurance (referred to as warranty & indemnity insurance outside the domestic market) and has published three annual reports on its claims experience. According to those reports, approximately one-in-five (19.4%) policies written result in a claim.[4] The largest deals from a dollar perspective (deal size over $1 billion) generate the highest claims frequency (24%) and the largest average claim ($19 million). An increased year-on-year claims frequency was reported across all classes of deal size. According to AIG, nearly half of all material claims (46%) resulted in what was termed a mid-sized payout (payment on the claim between $1 million to $10 million) with an average settlement of $4 million over the five year period of policies written between 2011-2016. That reported average settlement was up, from $3.5 million, in the prior report.

In 2018, AIG for the first time provided data broken down on breach type by industry sector as set forth below.[5]

AIG’s reported claims figures suggest that insureds have become more sophisticated in their use of the product with an impact on the frequency and severity of claims.

Judicial Determinations of First Impression

In 2017, the United States Court of Appeals for the Seventh Circuit became the first court of review to address a claim for indemnity under a representations and warranty policy in a published opinion.[6] A $23.4 million stock purchase deal for a specialty dairy products company which resulted in a $10 million settlement between the corporate buyer and the family members who had sold their 100% interest in the company was at issue before the court. The sellers purchased a seller’s warranty and indemnity insurance policy with an aggregate cover of $10 million over a $1.5 million retention which provided coverage for various representations made in the deal documents on a claims made basis with a policy period extending for six years after the closing.

The Seventh Circuit affirmed summary judgment in favor of the insurer. The court held that the settled claims were for breach of general representations for which the deal documents capped damages at $1.5 million. As a result, the damages attributable to covered claims (fraud claims were excluded under the policy) were limited to the amount of the insured’s $1.5 million retention such that the insurer had no liability. The court recognized that had the settlement been structured in a different way or the claims been litigated, such that allegations were made against the sellers in a complaint filed with a court of record subject to Federal Rule of Civil Procedure 11 or a state court equivalent, then the insurer might have been liable. The saving grace for the insurer here appears to have been that the insureds rushed to settle and did not structure their settlement in a way to invoke coverage. The court also recognized that the insured failed to give the insurer sufficient time to review and approve/reject the settlement before consummation.

While Ratajczak resulted in a decision for the insurer, the opinion left much room for creative buyers or sellers to structure claims in a way to obtain coverage where the policy drafter might have intended otherwise.

The Current M&A Cycle

M&A activity remains robust and many leading experts predict the trend to continue through 2018.[7] Representations and warranties products appear here to stay and have a place in a well-managed portfolio. However, these policies have long tail risk typically providing coverage for general representations up to three years and fundamental representations up to six years with some market participants reportedly offering longer coverage periods in an attempt to capture market share. What will happen if the current M&A market turns and current policyholders look to hedge loses by making increased claims or potentially assigning their interest in policies including assignments made in bankruptcy. Insurers would be well served to keep an eye on market conditions and work through strategies to address any increase in claims percentage or severity in advance of any economic downturn as such claims experience may directly impact loss ratios.

[1] The phrase unknown unknowns was popularized by former Secretary of Defense Donald Rumsfeld who on February 12, 2002, stated at a Department of Defense news briefing: “Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns – the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.” Transcript available at http://archive.defense.gov/Transcripts/Transcript.aspx?TranscriptID=2636, last visited May 24, 2018.

[2] AIG, Claims Intelligence Series, M&A Insurance – The New Normal?, May 2018, available at https://www.aig.com/content/dam/aig/america-canada/us/documents/insights/aig-manda-claimsintelligence-2018-r-and-w.pdf, last visited May 24, 2018.

[3] Gallagher Market Conditions, January 2018, available at https://www.ajg.com/media/1701903/rw-market-conditions-2018.pdf, last visited May 24, 2018.

[4] AIG, Claims Intelligence Series, M&A Insurance – The New Normal?, May 2018, available at https://www.aig.com/content/dam/aig/america-canada/us/documents/insights/aig-manda-claimsintelligence-2018-r-and-w.pdf, last visited May 24, 2018.

[5] Id., Source of Reprinted Graphic.

[6] Ratajczak v. Beazley Solutions, Ltd., 870 F.3d 650 (7th Cir. 2017).

[7] See, JP Morgan’s 2018 Global M&A Outlook, available at https://www.jpmorgan.com/jpmpdf/1320744801603.pdf, last visited May 24, 2018, and Deloitte’s The State of the Deal, M&A Trends 2018, available at https://www2.deloitte.com/content/dam/Deloitte/us/Documents/mergers-acqisitions/us-mergers-acquisitions-2018-trends-report.pdf, last visited May 24, 2018, among other forecasters.