I seriously don’t know why so many judges have seem to have such a difficult time applying insurance law. Don’t tell anyone, or coverage lawyers like me may have to reduce our hourly rates, but the whole body of insurance law really comes down to Four Simple Rules:

  1. Coverage provisions are supposed to be given the broadest reasonable construction in favor of the policyholder.
  2. Exclusions from coverage are supposed to be given the narrowest possible construction against the insurance company.
  3. As in baseball, ties go to the runner. The policyholder is the runner. So, if there is more than one reasonable construction of a word or a phrase in a policy, the policyholder wins.
  4. If any possibility of coverage exists for a lawsuit, the insurance company is supposed to defend its policyholder.

Really, that’s it. I just saved you from having to read thousands of pages in Appleman on Insurance Law.

Flomerfelt v. Cardiello, 202 N.J. 432 (2010) reviews The Four Simple Rules in detail, and is worth reading on the subject. The case involves an insurance company’s unsuccessful effort to escape liability coverage for serious injuries caused by a drug overdose at a party. You can read it here.

Which brings us to the very recent case of Port Authority v. RLI. The Port Authority case proves that even large organizations can get burned by judges who are uncomfortable with The Four Simple Rules. You can read the Port Authority decision here.

RLI sold a liability insurance policy to a company called Techno Consult. The Port Authority was an additional insured under the policy. The Port Authority hired Techno Consult to discover and report upon any unsafe conditions at a project at the Harrison PATH Station. Unfortunately, Michael Fiume, who was an employee of a subcontractor called Halmar, was injured when he slipped on wet ground and fell at the site. Fiume presumably collected substantial workers’ compensation benefits, which prevented him from suing his own employer. So he sued Techno Consult and the Port Authority.

Although there are several troubling aspects of the Appellate Division opinion from the point of view of policyholders, I want to focus on only one. Some New Jersey courts seem to be on a mission to eviscerate insurance companies’ duty to defend their policyholders under liability insurance policies, and to defeat The Four Simple Rules. The Simple Rule relating to the duty to defend is, again, crystal clear in 49 states: If there is a potential for coverage of an underlying lawsuit, the insurance company must defend. We can see this in Flomerfelt also, where the New Jersey Supreme Court stated: “The [underlying] complaint should be laid alongside the policy and a determination made as to whether, if the allegations are sustained, the insurer will be required to pay the resulting judgment, and in reaching a conclusion, doubts should be resolved in favor of the insured.” (Emphasis mine.)

In RLI, the definition of “additional insured” in the policy included “any person or organization that you agree in a contract or agreement requiring insurance to include as an additional insured on this policy but only with respect to liability for ‘bodily injury,’ ‘property damage’ or ‘personal and advertising injury’ caused in whole or in part by you or those acting on your behalf…” (Emphasis mine.)

Amazingly but perhaps not surprisingly, the Court found that, because the Fiume case settled and there had been no finding that Techno Consult had actually caused Fiume’s bodily injury, there was no coverage for the Port Authority. This portion of the decision turns the duty to defend on its head. Remember, if there is any possibility of coverage, the duty to defend exists. Here, there was a possibility that bodily injury had been caused by someone acting on the Port Authority’s behalf.

The RLI policy contained a “professional services” exclusion. The Court also held that, because Fiume’s injuries were allegedly caused by a company that had been retained to perform “professional services,” there was no duty to defend.  This portion of the decision is disturbing because the Court does not discuss its own ruling in S.t. Hudson Engineers, Inc. v. Pennsylvania National Mutual Casualty Co., 388 N.J. Super. 592, 607-08 (App. Div. 2006). In that case, which involved an engineering company’s failure to discover and warn about defects in a pier, the Court held:

“Allegations respecting a professional’s failure to provide adequate engineering, supervisory, inspection, or architectural services or to discover or remedy a condition for which the professional services were engaged would necessarily fall within the exclusion as dependent on the professional services provided. However, allegations encompassing the violation of a duty to provide information about a known danger resulting from either a negligent omission or commission, whether based upon the relationship of the parties or legal principle, are not dependent on the rendering of professional services. Instead, such allegations arise from the information actually possessed and not provided by a party obligated to disclose such information. Thus, for example, Robert Hudson’s alleged failure to advise the owners of the pier and nightclub that the pier was in imminent risk of collapsing, after obtaining that information from Tyson, would not be excluded simply because he had previously done engineering work. So too, any negligent misrepresentation regarding the condition of the pier would relate to the appropriate disclosure of known information, rather than the failure to provide professional services.”

The relevant question in the Port Authority case should have been: Is there any possibility that the Port Authority or Techo Consult could be held liable for failing to provide information about a known danger, irrespective of the purpose of Techno Consult’s engagement? Of course there was, and that means the Port Authority should have gotten a defense.

What are the takeaways from this? First, if you’re a plaintiff’s lawyer, you need to be very careful about how you phrase your complaints. Insurance is a word game, and as they used to say in Dragnet, anything you say can and will be used against you in a court of law. Say the wrong thing, and you may lose access to insurance coverage for your client’s injury. Second, if you’re a policyholder, you likewise must be very careful what you say when you notify your carrier of a claim. Optimally, the policy should be carefully reviewed by a coverage attorney and the notice of claim should be phrased in a way that brings the underlying lawsuit within coverage, or at least doesn’t blow coverage up. (No, that’s not a plug for business. It’s just a fact.) And third, this ruling is obviously very scary for policyholders. The Port Authority can afford not to have a defense for a personal injury suit. A mom-and-pop store cannot. Sadly, it seems as though you can’t count on insurance, which makes risk control and (legitimate) asset protection measures even more important.

If you were born and raised in New Jersey like me, you’ve heard your share of New Jersey jokes from interlopers who think the entire state looks like the Turnpike near Newark Airport. (“What exit?” How wonderfully clever.) My response to these jokes is two-fold. First, trust me on this, we don’t like you, either. Second, we have Springsteen, Sinatra, the Sopranos, the Jersey Shore, three Stanley Cups, and two New York football teams.

So, the more important issue is: Why does Delaware even exist?

I know, I know, the current President comes from Delaware. And so did George Thorogood. And Valerie Bertinelli. But really, other than that, all they have down there is a big bridge, one beach, and an army of corporate lawyers, right?

I’m kidding, of course. One other thing Delaware has is a Supreme Court with a keen understanding of insurance law. And since other states look to Delaware Courts for guidance with respect to business issues, that’s very important to those of us who represent policyholders in coverage litigation.

In the current environment, when business dealings go sour, it’s common for one side to accuse the other of fraud.  Fraud litigation can be exorbitantly expensive, and it’s not an exaggeration to say that the availability of insurance could mean the difference between bankruptcy and survival. Recently, the Delaware Supreme Court dealt with the question of whether claims alleging fraud are insurable. Insurance companies often say they’re not, and that’s what they argued before the Delaware Court. They lost.

The case, RSUI v. Murdock (which you can read here), dealt with whether a Directors’ & Officers’ excess liability policy covered shareholder litigation alleging illegal stock price manipulation by two officers of the Dole Corporation. RSUI provided insurance in the 8th layer of the coverage tower, with $10 million in insurance over $75 million in underlying limits.  There were two shareholder lawsuits. The plaintiffs won $148 million in a bench trial in one of them. RSUI disclaimed coverage for defense costs and the verdict, on the ground that insuring fraud was against public policy.

Insurance companies love to argue that business policyholders shouldn’t get the benefit of the rules of insurance policy construction, which generally favor coverage, because of their “sophistication.” (If you’ve been involved in coverage litigation long enough, this concept is funny. No matter how “sophisticated” you are, you still may need flowcharts, a dictionary, and a healthy dose of luck to figure out what most policies cover.)

Here, the Delaware Supreme Court turned the tables, and essentially found that the insurance company was “sophisticated” and shouldn’t be allowed to escape paid-for coverage based on some kind of implied morals clause. (“Your Honor, we’d love to cover this claim, but we all have to think of the greater good…”)

Specifically, the Court wrote:

The question here then is: does our State have a public policy against the insurability of losses occasioned by fraud so strong as to vitiate the parties’ freedom of contract? We hold that it does not. To the contrary, when the Delaware General Assembly enacted Section 145 authorizing corporations to afford their directors and officers broad indemnification and advancement rights and to purchase D&O insurance “against any liability” asserted against their directors and officers “whether or not the corporation would have the power to indemnify such person against such liability under this section,” it expressed the opposite of the policy RSUI asks us to adopt.

There are a couple of interesting lessons from this case. First, the policies under the RSUI layer paid out an astonishing $75 million in defending the securities fraud claims. While this case is an extreme example, litigation is breathtakingly expensive. Always avoid it if you can, by paying careful attention to risk management protocols. Second, don’t take the boilerplate language in insurance company denial letters as the last word. If the policyholders here had given up after RSUI’s claim denial, they would have been left with crushing liabilities. So: Get yourself a good lawyer who understands insurance law.

Here, that good lawyer was Kirk Pasich of Pasich LLP, who has been doing battle with carriers for decades. Props to Kirk on a fantastic result.

I’ve been representing policyholders in insurance coverage litigation for 35 years, and I’m convinced that I’ll never understand the logic of insurance company claim departments. They settle cases that I think they might want to fight, and they fight cases tooth-and-nail that I think they really should settle. (Maybe it’s me.)

The carrier’s claim file often doesn’t contain the type of rational, detailed analysis I would expect. (I’ve reviewed many in discovery.) Not long ago, I reviewed a claim file in which the carrier’s Vice-President and General Counsel informed the claim department (staffed solely by lawyers who were the GC’s subordinates) that he felt coverage was “doubtful” for an advertising injury claim. He hadn’t even reviewed the policies. Taking the cue from his strong suggestion, the claims lawyers composed a denial letter that included a thicket of insurance policy language not remotely relevant to the facts. And, once the coverage case got to Court, it didn’t end well for the carrier, which ended up having to pay the claim and my firm’s fees.

Here’s a tip for anyone involved in litigation: An excellent, basic way to analyze any liability claim can be found in the seminal New Jersey “bad faith failure to settle” case of Rova Farms Resort, Inc. v. Investors Insurance Co. of America, 65 N.J. 474 (1974). In Rova, the Court wrote: “While the view of the carrier or its attorney as to liability is one important factor, a good faith evaluation requires more. It includes consideration of the anticipated range of a verdict, should it be adverse; the strengths and weaknesses of all of the evidence to be presented on either side so far as known; the history of the particular geographic area in cases of similar nature; and the relative appearance, persuasiveness, and likely appeal of the claimant, the insured, and the witnesses at trial.” Id. at 489.  I rarely see this kind of thoughtful review in the carrier’s records.

Along these lines, as I write this, the Fifth Circuit has just issued an opinion about what happens when carriers fail to make decisions based on a fair and thorough analysis. The case is Am. Guarantee & Liab. Ins. Co. v. ACE Am. Ins. Co., No. 19-20779 (5th Cir. Dec. 21, 2020), which you can read here.

This was a rough case. A 43-year-old Houston firefighter, Mark Braswell, was killed when his bike crashed into a landscaping company’s trailer that was stopped on a four-lane highway. He left behind a widow and two children. No witnesses saw the collision, but some trial testimony suggested that the landscaping truck had stopped abruptly. And, instead of turning onto a less heavily-trafficked side street, the crew decided to unload equipment in the middle of the road. (Terrible idea.) During the week-long trial, a supervisor for the landscaping company admitted that stopping in traffic was dangerous. Compounding the problem, the workers failed to put out cones, flags, or lookouts to redirect traffic.

The landscaping company (Brickman) was insured by ACE (with a primary limit of $2 million), with excess coverage by AGLIC ($10 million excess of $2 million). ACE controlled Brickman’s settlement negotiations.

Before trial, ACE’s appointed defense counsel estimated the settlement value of the case to be $1.25 to $2 million. The excess carrier valued the claim at $500,000. To prepare for trial, ACE conducted juror research from which the ACE claim handlers drew two conclusions.  First, it was important to prove at trial that the truck did not stop short. Second, it was important to prove that the truck was legally parked. (In the middle of a busy highway. Brilliant.)  ACE also fixated on the fact that Braswell’s helmet had cracked down the middle, which the claims handlers believed would prove that Braswell had his head down and was not looking where he was going. No one on the defense side thought a verdict over $2 million was likely.

The Braswells’ lawyer demanded $2 million. ACE countered at $500,000. The Braswells rejected the offer, and the case went to trial. Things quickly went sideways for Brickman. The judge excluded evidence that Brickman’s truck was legally parked; allowed Braswell’s widow, Michelle, to testify that a Brickman employee had said that the truck stopped short; and allowed Michelle to testify about her daughter Mary’s psychological trauma, self-harm, suicide attempts, and hospitalization, all caused by her father’s death. After the plaintiffs’ closing statement, AGLIC’s case manager communicated that a verdict in excess of $2 million was possible “[g]iven the adverse evidentiary . . . rulings.” (Ya think?)

At this point, in my opinion, ACE needed to forget about all its great trial strategy and awesome appeal points, get out the checkbook, and pay the $2 million. Things were not going to end well. But, in an amazing display of tone-deafness, ACE instead decided to play General Custer. First, the Braswells’ lawyer offered a high/low of “$1.9MM to $2.0MM with costs.” (This meant that the Braswells would be guaranteed $1.9 million regardless of the verdict, but would recover $2 million plus costs if the jury rendered a plaintiff’s verdict.)   ACE said no. Then the Braswells’ lawyer demanded the policy limit of $2 million. ACE again said no, because, as everyone knows, jurors tend to side with giant insurance monoliths over widows and fatherless children. (I know, I know, the insurance company wasn’t the defendant. But come on, jurors aren’t stupid.)

The jury came back with a verdict of nearly $40 million. After deducting 32% for Mark’s comparative negligence, the total award to the Braswells was $28 million, which, of course, far exceeded ACE’s primary limit.  The Braswells eventually agreed to settle for $10 million to avoid a drawn-out appeal. ACE paid its $2 million limit, and AGLIC, the excess carrier, contributed $8 million.

This made the excess carrier unhappy. AGLIC contended that, because ACE decided to roll the dice at trial it should be responsible for the excess verdict. (I love it when these guys fight.) The Court agreed, writing:

“The evidence is clearly sufficient to support the bench trial verdict [in the coverage case between ACE and AGLIC] that ‘[a] reasonable insurer would have reevaluated the settlement value of the case [and accepted the Braswells’ third offer].’ After all, by the time that offer was made, the trial had taken a demonstrable turn against Brickman. Two of the adverse rulings (disallowing evidence that the truck was legally parked and allowing the stop-short statement attributed to a Brickman employee) aggravated Brickman’s greatest known weaknesses in this case. Considering all of the trial circumstances, an ‘ordinarily prudent insurer’ in ACE’s position would have realized that the ‘likelihood and degree’ of Brickman’s ‘potential exposure to an excess judgment’ had materially worsened since the trial’s inception. When presented with the Braswells’ third offer, an ordinary, prudent insurer would have accepted it. The evidence placed before the district court is sufficient to support that ACE violated its [duty of good faith] by failing to reevaluate the settlement value of the case and accept the Braswells’ reasonable offer.”

We can draw a lot of lessons from this decision, but perhaps the main one is: Never fall in love with your own story. Hubris kills.

I hesitated to write this blog post, which is intended to be nonpolitical. We’re currently in the middle of an exceedingly nasty election season, and any topic that even remotely touches on politics is likely to lead to online mayhem. But I was intrigued by the confirmation hearings I watched yesterday for President Trump’s Supreme Court nominee, Amy Coney Barrett, especially given an insurance decision that she once wrote. She often says that when she criticizes a judicial decision, she isn’t personally criticizing the judge who wrote it. I am posting this brief article in the same spirit.

Whatever your political views, it’s fair to say that Judge Barrett is a very smart person. She is a law professor, and also (as I write this) a sitting judge on the Seventh Circuit. But the one time she dealt with insurance issues,  I feel that her logic was exceedingly wrongheaded. I guess she eventually agreed, since she withdrew the decision. The mistaken decision again shows us why insurance companies prefer litigating before conservative judges in federal courts, rather than in the state court system. Conservative judges tend to favor insurance companies. That’s not intended to be a political statement; it’s just an observation based on many years of experience. (And I respectfully decline to disclose any of my personal political views!)

The case, Emmis Communications v. Illinois National, dealt with the question of Directors’ and Officers’ liability coverage for litigation resulting from a complicated plan to take a company private. In 2010, seven separate shareholder lawsuits were filed against the policyholder, Emmis, after the go-private plan was abandoned. Emmis reported the lawsuits to its carrier, Chubb, which accepted coverage under a reservation of rights. The lawsuits were voluntarily dismissed, and no class was ever certified. Later, in 2011, a major shareholder filed a derivative action against Emmis’s Board of Directors, relating to an aspect of the collapsed deal. Chubb eventually accepted coverage for that suit as well.

Then, in 2012, five preferred shareholders brought suit against Emmis under federal securities laws, alleging some facts that were similar to those relied upon by plaintiffs in the prior cases. Chubb denied coverage on the ground that the 2012 securities case wasn’t related to the earlier cases, which contained different claims, so Chubb had no obligation to defend.

So, if the cases weren’t related, and the 2012 case was an entirely new and different matter, Illinois National (the carrier in 2012) was obligated to provide a defense, right? Right?

The beauty of insurance policies, from the carrier’s perspective, is that they’re like exploring a wonderful forest! So many arcane exclusions and limitations hiding in all the nooks and crannies!

Here, the Illinois National policy excluded claims “as reported under [the Chubb policy].” Too bad, so sad, said Illinois National. You reported the claim under the Chubb policy, so you’re out of luck. (Never mind that Chubb denied coverage. That’s a mere technicality.)

Emmis sued Illinois National to enforce coverage. In the District Court, Emmis argued that the language of the exclusion was ambiguous, and that it only applied to claims that already had been reported to Chubb at the time the Illinois National policy went into effect. The District Court took mercy on Emmis, writing as follows.

The Court disagrees with INIC that the relevant language is unambiguous. The term “as reported under [the Chubb Policy]” could be read to refer to any claim that is reported under the Chubb Policy at any time, as urged by INIC, but it also reasonably could be read to refer to any claims that had been reported under the Chubb Policy at the time the INIC Policy went into effect, October 1, 2011, as urged by Emmis.

Emmis Commc’ns Corp. v. Ill. Nat’l Ins. Co., 323 F. Supp. 3d 1012, 1023 (S.D. Ind. 2018).

Enter the Seventh Circuit, and Judge Barrett, who reversed the District Court, and, ignoring the rules of construction and the purpose of insurance (which is “to insure”), wrote:

On appeal, the parties briefed many legal issues arising from the Byzantine exclusion language. But we can resolve this case on a single issue: the meaning of “as reported.” We disagree with the district court’s opinion; Illinois National’s proposed interpretation is correct. The phrase has no discernable temporal limitations. Once Emmis or one of its agents reports a claim to Chubb, at any time, then that claim is “reported”—and so is excluded. The timing of the report is irrelevant. Emmis acknowledged in its brief that it did in fact report its claim to Chubb. That resolves our inquiry. The exclusion applies, so summary judgment should have been entered in favor of Illinois National.

Emmis Commc’ns Corp. v. Ill. Nat’l Ins. Co., No. 18-3392, at *3 (7th Cir. July 2, 2019).

One reason I find this decision interesting (apart from the general concept that a “Byzantine exclusion” is unambiguous) is that, when I listened to Judge Barrett testify, she talked about using secondary materials to discern the true intent of the framers of the Constitution. I’m not sure why interpreting a “Byzantine exclusion” should be any different. There is no reasonable way that a policyholder would buy a policy that allows for a disclaimer of coverage, leaving the policyholder to its own devices, simply because more than one carrier had been notified of the loss. If you’ve been involved in insurance coverage for a while, you know that the “as reported” language is designed to prevent coverage for “known losses” – namely, the “fortuity” argument that insurance companies often trot out. (The validity of the so-called “known loss” doctrine is a topic for another post.) The language is not designed to cause a forfeiture of coverage for a claim that’s different from a claim that was reported under a prior policy.

Emmis moved for reconsideration and, to their credit, Judge Barrett and the panel quietly reversed their prior decision and affirmed the grant of coverage, for the reasons stated in the District Court decision. The language was ambiguous, and had to be construed in the policyholder’s favor. Emmis Comm. Corp. v. Ill. Nat’l Ins. Co., 937 F.3d 836 (7th Cir. 2019).

Here are a few takeaways from this case.  First,  Emmis did the correct thing here. Do not notify carriers selectively. Notify every carrier that potentially could provide coverage. Force them to take a position. Second, if you have to litigate, be prepared to deal with judges who don’t fully understand insurance law. I’ve been practicing coverage law for 35 years, and I learn something new every day. Yet we expect judges to master every area of law, from Admiralty to Zoning, which is simply unrealistic. And finally, don’t give up too easily. As Emmis happily learned, if you refuse to take “no” for an answer, sometimes good things can happen.


We have a coverage case in the office that’s 15 years old, with no end in sight. The amazing thing is, it’s not even a particularly complicated case. I don’t want to go into too much detail or give the names of the parties, because the matter is still pending. But even if we eventually get the carriers to pay the claim, they’ve won, because they’ve already invested the premium dollars and the potential claim payment, and turned a tidy profit. (By the way, they lost a coverage trial on liability 10 years ago, and since then have been using the concept of appropriate allocation-of-loss to delay the day of reckoning. They’re truly masters at throwing molasses into the machinery.)  It’s quite shameful, and very frustrating that so few judges are willing to call carriers out on it.

The situation calls to mind the words of Rutgers Professor Jay M. Feinman in his wonderful and insightful book, “Delay Deny Defend” (Delden Press 2010). Professor Feinman writes:

“The time lag between taking in premiums and paying out claims (the ‘float’) and the income earned in that time is a major source of profit; in 2007, industry investment profits totaled $58 billion. As Warren Buffett, whose Berkshire Hathaway owns GEICO and other insurance companies has said, float is the great thing about the insurance business, because ‘it is money that is not ours but which we get to invest.’”

This is the game that carriers often play on many complex commercial insurance claims in New Jersey. First, take a “no pay” position and dare the policyholder to sue. Many won’t. Then, if the policyholder sues and establishes liability, the carrier argues that it’s only responsible for a small allocated share. Meanwhile, the carrier pays its lawyers cut rates to defend the coverage claim, while investing the money it otherwise would’ve had to pay out on the policyholder’s behalf. What a deal.

This was never the way allocation was supposed to work, of course. As the late Justice O’Hern wrote in the seminal New Jersey allocation case of Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437, 479 (1994):  “Insurers whose policies are triggered by an injury during a policy period must respond to any claims presented to them and, if they deny full coverage, must initiate proceedings to determine the portion allocable for defense and indemnity costs. For failure to provide coverage, a policyholder may recover costs incurred under the provisions of Rule 4:42-9(a)(6).”

Under Owens, if a carrier denies the claim outright and doesn’t initiate the required allocation proceedings, the logical conclusion is that the carrier should be held liable for the full amount of the loss. Unfortunately, many judges are uncomfortable with that concept, so the delay, deny, defend game continues.

Another case in our office offers an interesting twist on the subject of allocation and delay. (I’m again omitting the names, because the case is still pending.) The case involved the sometimes-tricky area of advertising liability coverage. Basically, the relevant policy provided coverage for copyright infringement committed in the course of advertising activity. Our client got sued by a competitor for allegedly providing access to an infringing computer program, including on our client’s website, in an effort to attract customers. The legal fees spent defending the suit were significant. The case eventually settled, with no liability to our client. Two carriers potentially carried coverage for our client. Carrier One, apparently figuring it had better things to do with its time, paid roughly half the defense costs in exchange for a release. But Carrier Two refused to budge off its “no pay” position, so we had to sue. There were several policy interpretation issues involved, but the essential point was that Carrier Two sold a policy covering copyright infringement, and then denied the claim on the ground that copyright infringement shouldn’t be covered because it was an intentional wrong.


The Trial Court, in granting summary judgment in our client’s favor and awarding us our legal fees in the coverage case, wrote in part: “[T]he…Policy defines ‘advertising injury’ in four ways; relevant to this matter is the first definition: (1) Infringement of copyright. According to [the competitor’s] complaint…, [the policyholder] allegedly infringed on [the competitor’s] copyrights directly and contributorily. And so, by promoting its own product, [the policyholder] was engaged in advertising when it allegedly caused an advertising injury — as defined by the…Policy — to [the competitor].”

In other words, if you sell a policy covering copyright infringement in advertising activity, you may have to cover a lawsuit alleging copyright infringement in advertising activity. What a unique concept.

With respect to allocation, the Court wrote, quite simply: “ The New Jersey Supreme Court has consistently held that ‘if a complaint includes multiple or alternative causes of action, the duty to defend will attach as long as any of them would be a covered claim and it continues until all of the covered claims have been resolved.’  Here, two out of the four claims that [competitor] alleged against [policyholder] in the 2012 Action — the two copyright claims — are covered by the…Policy. Thus, to allow [carrier] to avoid its duty to defend [policyholder] would contravene New Jersey Supreme Court precedent and public policy.”

The decision has been affirmed on appeal, but the insurance company has now successfully moved for reconsideration of the appellate decision, on the ground that the rules provide for oral argument, and the Appellate Division issued its affirmance without giving counsel his time to shine. Delay, deny, defend.

The key to defeating the delay, deny, defend (“DDD”) stratagem is to impose costs on the carrier beyond the amount of the insurance claim. That can throw the whole insurance company equation out of whack. Sadly, bad faith law has largely been gutted in New Jersey, with Courts holding that unless the policyholder can succeed on summary judgment against the insurance company with respect to the coverage claim, bad faith doesn’t exist.  Since defeating summary judgment only requires a single issue of fact, the bad faith standard is difficult to meet.

There are, however, other ways to threaten the insurance company with extracontractual damages and combat DDD. One is R. 4:42-9(a)(6), which allows policyholders to recover their attorneys’ fees against the insurance company if they have to sue to enforce coverage on a third-party liability claim. Of course, the insurance industry has managed to convince one Appellate Division panel that the rule should not apply to allocation proceedings, despite the express language of Owens-Illinois to the contrary, and despite the fact that “allocation” is currently a primary weapon in the carriers’ DDD arsenal. (Litigating against the insurance industry is a lot like playing Whack-A-Mole.)

Another tool for policyholders in state court (but not federal) is the Offer of Judgment rule, R. 4:58. Basically, the policyholder files a settlement demand with the Court at least 20 days before the trial date in the coverage case. The insurance company can accept the demand up to 10 days before the trial date, or 90 days after service of the demand, whichever is sooner. If the policyholder recovers at least 120% of the offer (not including allowable legal fees or interest), then, in addition to the money judgment, the policyholder is entitled to legal fees incurred, plus 8% interest from the date of the offer or the date of completion of discovery, whichever is sooner.

The last tip I’ll offer on this post is, when the insurance company agrees to accept a “share” of the loss, immediately demand to see a proposed allocation in writing. If the insurance company fails to comply, or uses suspect methodology that does not accord with the facts of the case, it may eventually support the elusive bad faith ruling.  Keep in mind that, with respect to commercial property and liability policies for which the annual premium is $10,000 or less, insurance companies are required to respond to pertinent claim communications within 10 business days. N.J.A.C. §11:2-17.6.




My maternal grandfather, Pasquale Cupito, was a legend. I have far too many stories to list here, but one of them involves a giant garbage can lid that he used as a cooking utensil. See, he could make a mean homemade pizza, but there was never enough to keep everyone satisfied. One day he concluded that a garbage can lid might make a dandy and enormous pizza pan, so he hammered one out, washed it, and drafted it into service on holidays. For years, people marveled about the delicious pizza and the very large and unusual-looking pan he employed to make it. But, as a member of the Inner Circle, I knew the truth. (I also remember my grandmother, a child of the Depression, complaining about the copious amount of cheese he used, but that’s another story.)

Grandpa’s garbage-can-lid-pizza never made anyone ill, but there was recently a close call for a gluten-free pizza crust manufacturer here in New Jersey known as  Conte’s Pasta. Conte’s sold its crusts to a frozen pizza manufacturer, Nature’s One, which in turn sold pizza to Trader Joe’s, a major high-end supermarket.

Somehow, the pizza crust became contaminated with listeria, a nasty bacteria, which Trader Joe’s discovered before selling the product to the public. Trader Joe’s returned the entire inventory of Nature’s One pizza, requiring Nature’s One to issue a $150,000 refund, which is a lot of dough. (See what I did there?)

Understandably concerned, Trader Joe’s sent inspectors into Conte’s facility, who determined that Conte’s pizza crust manufacturing process was insufficiently safe.

Nature’s One then sued Conte’s, contending that it had lost $170K in product as the result of Conte’s defective manufacturing processes, as well as a lucrative contract with Trader Joe’s. Conte’s submitted the claim to its liability carrier, Republic, which tossed it aside. (See what I did there? Toss? Pizza?)

Unfortunately for Conte’s, the policy contained a so-called sistership exclusion, removing coverage for damages associated with product recall, as follows:

Damage claimed for any loss, cost or expense incurred by you or others for the loss of use, withdrawal, recall, inspection, repair, replacement, adjustment, removal or disposal of:

(1) “Your product”;

(2) “Your work”; or

(3) Any property of which “your product” or “your work” forms a part;

if such product, work, or property is withdrawn or recalled from the market or from use by any person or organization because of a known or suspected defect, deficiency, inadequacy or dangerous condition in it.

Conte’s conceded that the sistership exclusion left the contamination claims with little spice (see what I did there?), and the Court accordingly found no coverage for that aspect of the claim.

The Court also found that there was no coverage for damages associated with Conte’s failed inspection, such as loss of goodwill and profits. That’s because this part of the underlying claim involved only “economic loss,” and, as New Jersey judges (state and federal) love to say, there’s no coverage for “economic loss.” Of course, all damages are “economic loss” because they involve money, and the claim here resulted from property damage, since the Nature’s One product was damaged by listeria. Damages resulting from property damage should be covered by insurance.  But far be it for me to stand in the way of a judge-made exclusion.

Despite all this, Republic was unable to escape coverage for the loss. In addition to its other theories of liability, Nature’s Own had claimed that Conte’s committed conversion; essentially, Nature’s Own argued that Conte’s had wrongfully retained possession of some equipment provided by Nature’s Own in connection with performing the contract. Since the insurance policy covered claims for loss of use of tangible property, coverage existed, and Republic had to provide a defense.

Republic argued that conversion is an intentional tort, and intentional damage was excluded by the policy, but the Court found that conversion could potentially be committed negligently, and that was enough to trigger the duty to defend.

If Republic follows the usual insurance company script, Republic will now move for reconsideration, and, assuming that the motion is denied, will argue that it only has to pay for a fraction of the defense, since only one claim is potentially covered. Republic may also argue that it cannot in good conscience provide a fair defense, because of the conflict of interest between Conte’s and Republic. Namely, Republic wants a finding of intentional harm in the underlying case, leading to a finding of no coverage, while Conte’s wants, at worst, a finding of negligence, so that coverage exists. Under New Jersey law, though, as long as Conte’s agrees to a reservation of rights, the potential conflict shouldn’t matter.

This decision is a reminder of the way the duty to defend is supposed to work: If any of the allegations in the underlying complaint are even arguably covered, the insurance company is supposed to step up. In other words, if you’re a policyholder, don’t take no for an answer. And, under New Jersey law, if you have to file a coverage suit on a third-party liability claim like this one, and you’re successful, you’re entitled to recover your legal fees spent chasing the carrier.

So, while Conte’s likely won’t recover the whole pepperoni from its carrier, some is better than none.

Counsel for Conte’s was Jonathan Wheeler of Wheeler, Diulio & Barnabei. You can read the full decision here.

I promise not to discuss COVID-19 in detail in this post. The recent deluge of hot legal takes about the pandemic may be making a lot of people sicker than the virus itself. So, let’s talk about a different, earlier disaster.

Believe it or not, eight years after the winds of Hurricane Sandy struck New Jersey, they’re still blowing through the state’s court system. Recently, the Appellate Division upheld a multimillion-dollar verdict against an insurance brokerage for failing to provide proper advice about storm coverage in advance of Sandy. And while I just promised not to focus on you-know-what, the truth is that after any disaster, when businesses learn they have no coverage, insurance professionals have a great big bullseye on their backs. So, I expect a wave of broker liability litigation relating to the pandemic, starting with “I didn’t know we had a virus exclusion.”

The recent Sandy decision is Wakefern Food Corp. v. Lexington Insurance Company, which you can access here. The Wakefern facts are straightforward. Wakefern owns Shop-Rite supermarkets. The organization hired two brokers, BWD Group and The Associated Agencies, to help with risk management advice and coverage interpretation, and to place appropriate policies.

To save money, Wakefern wanted to keep the deductibles low under its property policies. But when renewal time rolled around in 2012, Wakefern’s then-carrier, Affiliated FM, offered coverage that involved an increased premium, and an increased per-location deductible (from $10,000 to $100,000), based on Wakefern’s loss experience. The Wakefern people asked the brokers to get other quotes.

Ultimately, Wakefern’s brokers offered two choices. First, the renewal with Affiliated FM at a cost of $5.8M. Second, a program through Lexington (AIG) at a cost of $4.6M.

Wakefern selected the less expensive option, through AIG.

Unfortunately, unlike the Affiliated FM program, the AIG program had a “Named Storm Deductible” of 2% of the total insured value of each location. When the policies were bound, the brokers didn’t explain the significance of the named storm deductible, or how it worked. Since Sandy was a named storm, I think you can see where this is going.

A word here about named storm deductibles. The difference between a regular deductible and a named storm deductible is that regular deductibles are usually a flat rate in dollars (as in, “$10,000 per occurrence deductible”) while a named storm deductible is expressed as a percentage of the risk value. This usually makes for a higher deductible should a loss happen, but the tradeoff is that the policyholder gets a more affordable policy. Of course, sometimes you get what you pay for…

There’s an old saying in baseball that when you’re not ready in the field, the ball will always find you.  About a month after the coverage was placed, Sandy hit, with devastating results. 150 Wakefern stores were impacted.  Many lost all their merchandise.

Wakefern submitted a claim to AIG for $55.4 million in losses. AIG paid only $24 million, because of the reductions caused by the named storm deductible. Wakefern was unhappy, and sued AIG and the brokers.  AIG and Associated settled with Wakefern, but BWD elected to roll the dice with a jury. Unfortunately for BWD, the jury sided with Wakefern on the issue of BWD’s professional negligence, returning a plaintiff’s verdict of almost $11 million, plus over a million dollars in interest.

Both sides appealed, raising various legal issues. In this post, I’m focusing only on the issue of BWD’s liability. Basically, BWD argued that its conduct was not the “proximate cause” of any harm suffered by Wakefern, because, for example, Wakefern had produced no evidence showing that another carrier would’ve paid more on the claim than the $27 million paid by AIG. (Nonlawyers: “Proximate cause” means that someone’s negligent conduct was a “substantial contributing factor” in causing damages.)

The Court rejected BWD’s argument, writing: “BWD’s argument ignores Wakefern’s main contention, i.e., that the availability of a better policy was not explored by [Wakefern] because the information BWD supplied was incomplete. Moreover, BWD never accurately explained the ramifications of the NSD. Therefore, before they bound the [AIG] policy, Wakefern’s executives did not understand the application of the NSD would result in a deductible of $24 million.”

Drilling down on the specifics, the Court held that Wakefern had proven the following facts through expert testimony: “BWD’s contract required it to provide  professional assistance and interpretation of policy terms; BWD did not meet the standard of care; when BWD procured insurance in 2012, it focused almost entirely on price and ignored other factors; BWD should have given a full explanation of the NSD; the missing information represented a deviation from the broker’s standard of care; BWD did not explain the differences between the expiring Affiliated policy and the Lexington policy; up until 2012, Wakefern did not have an insurance policy with an NSD so BWD was required to explain this deductible; and BWD failed to follow up with other insurance carriers who provided an initial quote.”

A few observations about this case.

First, given the disaster that is our litigation system, I think most cases should settle.  As an outside observer, I obviously don’t know what settlement discussions took place before this trial.  There’s an old saying that “some cases just have to be tried.” I don’t believe that. Risk assessment may be complex, but it’s doable in every case, through the use of focus groups and other techniques. There is, really, no case that has to be tried. There are, however, professionals (lawyers, insurance adjusters, and clients alike) who fall in love with their own story, can’t be budged, and end up having to take unpleasant medicine. I’m not saying that happened here. I’m just saying it’s something we all have to look out for.

Second, the contract between BWD and Wakefern specifically obligated BWD to interpret and explain coverage provisions. Yet BWD waited until the day before Sandy struck to alert Wakefern of the significance of the named storm deductible. Failing to abide by clear contractual obligations in a timely way will always have an impact on a jury. Know what’s required by your contract.

Third, it’s a good idea to have coverage counsel review your program from time to time. Seemingly inconsequential provisions, or so-called “boilerplate” language, can come back to bite you. Given the often incomprehensible maze contained in many policies, even experienced counsel may not be able to identify every potential issue…but you might be able to avoid expensive litigation if you do everything possible to flag the main issues ahead of time.

By the way, lead trial counsel for Wakefern was Sheri Pastor at McCarter & English, a top-notch insurance coverage litigator who did her usual great work.

In the 2008 film Wall-E, Earth is a post-apocalyptic wasteland with nothing on it but the abandoned remnants of human society, and a forlorn, trash-compacting robot. The robot’s only living company is a pet cockroach named Hal, which I guess is Pixar’s nod to the popular notion that cockroaches will outlive us all. (Or maybe it’s a tribute to Hal in 2001: A Space Odyssey.)

You know what else will outlive us all? Law firm marketers. I guarantee that if, heaven forbid, there’s ever a nuclear holocaust, the first e-mail alert from a law firm will appear within a half hour, explaining why you do or don’t have coverage for the problem, what the implications are for employers, and how you’d better tighten up your cybersecurity. (Maybe it’ll even be from me…)

The marketing barrage started quickly with respect to the COVID-19 issue, and with good reason. Many businesses, especially small and medium-sized ones, are suffering devastating economic losses as a result of the pandemic. The insurance industry is drawing a “no pay” battle line.  One prominent insurance defense firm writes in a recent “Alert,” for example: “The coronavirus is contagious. The same can be said of articles, penned by coverage lawyers, addressing the potential availability of insurance for losses tied to the pandemic. We’ve lost track of how many we’ve seen.”

Ouch. That hurt.  (And also, who uses pens to write articles anymore?)

Criticism of policyholder-side coverage lawyers notwithstanding, businessowners have been asking us specific and urgent questions about business interruption insurance in the context of the current public health emergency. I’m ever the optimist when it comes to coverage questions, but I unfortunately think that many business interruption claims may be a tough row to hoe.

I’ve written before about how business interruption insurance works (here, for example).  Basically, business interruption insurance is insurance coverage that can replace business income lost for a period of time after a disaster.  Business interruption insurance isn’t sold as a separate policy, but is either added to a property-casualty policy or included in a comprehensive package policy as an add-on or rider.

To begin with, all policies are not created equal. You must read your policy carefully, not simply make assumptions about what it says. Many policies, for example, contain a specific exclusion for losses due to viruses or bacteria (ISO form CP 01 40 07 06),  reading: “We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.” This exclusion is going to be a tough hurdle, although I know from discussions with my colleagues that there are some creative arguments being considered, especially with respect to policies that don’t have an anti-concurrent causation clause.  (I wrote about those clauses here.)  The argument will be that the proximate cause of loss is a shutdown by civil authority, not the virus itself.

Leaving the exclusion to one side, business interruption insurance generally requires some type of direct physical loss in order to be triggered. If you can’t show that your building (or a structure in proximity to your building, or a facility in your supply chain) was actually contaminated by the virus, then where’s the direct physical loss?  I can see a (defense-oriented) Court saying, all you have here is a shutdown to prevent further spread of a virus that hasn’t directly harmed your property. (Of course, if there’s evidence of contamination within your building, or that of a supplier, or a nearby building, that may change the coverage picture considerably.)

One potentially helpful case is Gregory Packaging, Inc. v. Travelers Property and Casualty Company of America, 2014 U.S. Dist. LEXIS 165232 (D.N.J. Nov. 25, 2014), which you can read here. Gregory Packaging involved the release of an unsafe amount of ammonia from a refrigeration system in a juice packaging facility.  The plant had to be shut down and decontaminated.  The policyholder filed a claim for business interruption coverage for the downtime. Travelers denied coverage (of course), on the ground that there was no “direct physical loss.” The Court disagreed, holding that “physical damage” meant “a distinct, demonstrable, and physical alteration” of a property’s structure. In other words, you don’t necessarily need damage that you can actually see, as long as the utility of the property has been affected. The Court ultimately determined that ammonia, a dangerous gas, had rendered Gregory Packaging’s building temporarily uninhabitable, which constituted a “direct physical loss” sufficient to trigger coverage.

The key is, there was actual, proven contamination within the building, not just a fear of contamination.

Another potentially helpful case is Wakefern Food v. Liberty Mutual Fire Ins. Co., 406 N.J. Super. 524 (N.J. Super. 2009), which you can read here. That case involved a group of supermarkets and the 2003 power blackout, which was caused by problems with the electrical grid.  The supermarkets suffered food spoilage during the four-day interruption in electrical service, and filed a business interruption claim with Liberty Mutual. The policy required “physical damage” to off-premises electrical equipment in order to be triggered.  Too bad, so sad, said Liberty Mutual. There was no physical damage to equipment here; basically, some circuit breakers in the system simply tripped, causing a cascade effect, because some wires in Ohio had sagged and contacted trees.

Fortunately, the Appellate Division disagreed, writing: “In the context of this case, the electrical grid was ‘physically damaged’ because, due to a physical incident or series of incidents, the grid and its component generators and transmission lines were physically incapable of performing their essential function of providing electricity. There is also undisputed evidence that the grid is an interconnected system and that, at least in some areas, the power could not be turned back on until assorted individual pieces of damaged equipment were replaced.” (Emphasis added.)

Here again, we have physical damage in a direct causal chain to the policyholder’s premises. I suspect that the less direct the effect, the harder it will be to convince a judge to enforce business interruption coverage.

This is not to say that you won’t succeed on a business interruption claim relating to COVID-19.  In fact, if you’re a business policyholder affected by the virus (and at this point, what business isn’t), you should probably file a claim and force the insurance company to take a position. Then you can decide whether to pursue the matter further.

I’m just cautioning you not to get your hopes up yet, because you’re probably in for a fight. And it’ll be awhile before we see how the Courts respond.

Stay safe.

Update as of March 27, 2020:   Two business interruption coverage lawsuits have now been filed, one in California, one in Louisiana. by the same lawyer, John Houghtaling.  The California suit alleges coverage under the Civil Authority provision of the property policy.  The allegations say that COVID-19 has physically damaged “public and private property, and physical spaces in cities around the world and in the United States”  and that the virus “physically infects and stays on surfaces of objects or materials, ‘fomites,’ for up to twenty-eight days.”  It notes that “China, Italy, France and Spain have implemented the cleaning and fumigating of areas before allowing those areas to re-opened to the public.”  The California complaint also observes that the California stay-at-home order says that it was “issued based on evidence of physical damage to property.”  So, we’ll see…

Here’s a piece of useless trivia for you.  You know that old saying that something “isn’t worth the paper it’s written on”? The saying apparently originated back in 1861, when Count Johann Bernhard von Rechberg und Rothenlöwen (remember him?), an Austrian statesman, was presented with a document recognizing Italy as a nation-state, and first uttered those now-familiar words.

You might want to remember Count Johann’s opinion the next time someone shows you a certificate of insurance.  As you probably know, a certificate of insurance is a document, normally issued by an insurance broker, that supposedly verifies the existence and terms of an insurance policy. It’s common in the construction industry, where contractors and subcontractors are generally required to carry certain types of coverage, but really, the insurance card in your car is also a kind of certificate of insurance. The certificate of insurance is one of the most important documents that you can review in connection with your business contract, because if something goes wrong, you may need to tap that coverage.

The problem is, when it comes to enforcing the terms of the coverage reflected on the certificate of insurance, the certificate of insurance is essentially worthless. It’s just a written statement by an insurance broker, not an actual policy.  While it might get the broker or policyholder into trouble for negligence or misrepresentation if it’s not valid, it creates no rights against the insurance company.

In one case out of Illinois, for example, the question was whether a certificate of insurance created rights for a property owner (United) under the general liability policy of a roofing contractor (Taylor). The certificate said that United was covered under Taylor’s policy. The problem was that, unbeknownst to United, the policy itself provided no such coverage. One of United’s employees fell off a ladder supplied by Taylor. This being America, the employee sued Taylor, which then sued United (the classic “claim-over” scenario.).

The court held that there was no coverage for United, writing: “The Certificate Issued to United Stationers served as adequate warning that it could not simply rely upon the certificate for the terms and conditions of coverage, including whether it was an additional insured under the CGL policy.”  The Court also flatly stated: “The policy should govern the extent and terms of coverage.”  You can read the case, United Stationers v. Zurich American, by clicking here.

The United case may have involved a mix-up in the paperwork, but some cases involve straight-up fraud. We recently handled a matter in which a contractor forged a certificate of insurance required by a contract, presumably because he couldn’t afford the actual coverage. This happens more often than you might think.  Anyone, really, can easily fake an insurance certificate. Suppose a subcontractor with whom you’re worked before runs into money troubles. He lets his policy lapse, but he needs the work, so he uses the miracle of modern technology to “modify” an existing certificate.  Or, someone decides to start his or her own shop.  Insurance is expensive, so the budding entrepreneur takes a certificate from a previous employer, applies a few keystrokes, and presto!  The new operation is suddenly “insured.” Or, a subcontractor has a very basic policy that doesn’t include contractually required provisions, like  primary and noncontributory language, or a necessary “additional insured” endorsement. Once again, through the miracle of technology, he or she is able to make a few “amendments” to an old certificate and send it over.

And a potential fraudster doesn’t even need to “doctor” an existing document.  There are websites that provide blank certificates of insurance that can be filled out by anyone.

(By the way, for a New Jersey case involving a fraudulent certificate, take a look at Mendoza v. DiPiazza, a 2016 decision from the Appellate Division, which you can access hereMendoza involved a forged workers compensation certificate supplied by a roofing contractor.)

Any time you receive a certificate of insurance, you should contact the broker whose name appears on the certificate to verify that the coverage actually exists, and that the broker is a legitimate organization. In a perfect world, you should also ask to see the actual policy, although in practice, contractors and subcontractors mightily resist that. (Which leads to the question: why?)

There are also some obvious red flags, like the following:

  • If the certificate of insurance appears worn, looks blurry, or has lines that are uneven, you may be dealing with a forgery. Any time a broker issues a legitimate certificate of insurance, it will appear new. Also, most brokers use the Acord-25 form of certificate.  Check the bottom left-hand corner of the Certificate for the words “Acord-25.”
  • Automated certificate systems use the same font throughout the document. If the font within the document does not match up, it’s a sign of forgery.
  • If you look closely at the document, and it appears that whiteout was used (for example there are white dots within letters, or within sentences), red flag.
  • Does the contact information for the insurance broker appear on the document? If not, then your business acquaintance may be trying to keep you from verifying that the coverage is valid. Red flag.

There are some simple ways to “trust but verify.” First, simply call the broker listed on the certificate and ask. (Confirm what he or she tells you in a follow-up email.)  Second, for workers compensation coverage only, you may be able to verify the coverage through the New Jersey Compensation Rating & Inspection Bureau.  You can reach the NJCRIB website by clicking here. Other states have similar verification services. Third, you can request that the certificate of insurance come directly from the insurance broker. Most brokers will be happy to accommodate you. And fourth, you can and should request that copies of all policy endorsements be attached to the certificate.

Otherwise…you may be holding a document that isn’t worth the paper it’s written on.

Not long ago, there was a kerfuffle over the use of the term “OK, Boomer,” which I guess is a pejorative term aimed at my generation for being out-of-touch with the modern world.  (See the Vox article here.)  Truth be told, maybe we are out of touch, at least about some things. As someone who grew up without a laptop or an iPhone, and whose family had a rotary phone on the wall, with the handset connected by a curly cord, I’m not sure I’ll ever be fully comfortable with technology. Part of that, of course, could be the result of being a trial lawyer. I’m not against technology in the courtroom by any means, but I always have poster boards handy as backup. I’ve cringed a few times while watching another lawyer’s high-tech presentation come crashing down. A few years ago, it actually happened to me, while I was giving a talk to a group of business executives. Unbeknownst to me, my IT consultant, in an effort to save me a few bucks, had installed some kind of knockoff version of Windows on my laptop, with predictable results. But, once again, I was saved by the miracle of poster board (or, as we Boomers used to call it, “oaktag”).

There’s a famous quote attributed to Joseph Heller (the author of Catch-22) that goes:  “Just because you’re paranoid doesn’t mean they aren’t after you.”  Being suspicious of technology can be a healthy trait.  For one thing, we’ve handled our share of cyber-insurance claims at our firm, and there seems to be no doubt that the insurance industry is going to continue to fight coverage.  There hasn’t been a lot of litigation yet over the terms of stand-alone cyber-liability policies, but there continue to be disputes over whether standard business-owners’ policies provide any protection against cyber-claims.

Federal courts generally aren’t famous for being policyholder-friendly, so I’m always pleasantly surprised when I see a federal court decision favoring coverage. SS&C Technology Holdings v. AIG Specialty Insurance was such an event, and it involved a cyber-claim.  (The case was handled by Robin Cohen and her folks at  McKool Smith, a top-notch policyholder-side coverage practice.)  You can read the SS&C decision here.

The factual scenario was pretty familiar, cyber-wise.  SS&C sells software and software-related services, and one of its clients was a company called Tillage.  Crooks using stolen credentials emailed money transfer requests to SS&C, falsely claiming to be acting on behalf of Tillage. As a result, SS&C transferred $5.9 million from Tillage’s accounts to certain bank accounts in Hong Kong.

Tillage wasn’t happy about that, and sued SS&C, arguing that SS&C had been negligent in handling Tillage’s funds.

SS&C notified its errors & omissions carrier, AIG, of the incident. AIG agreed that the lawsuit fell within coverage, and agreed to cover SS&C’s defense costs. Confusingly, though, AIG disclaimed any liability for indemnity coverage, arguing that the lawsuit fell within an exclusion that removed coverage for claims “alleging, arising out of, based upon or attributable to a dishonest, fraudulent, criminal or malicious act, error or omission, or any intentional or knowing violation of the law.”

Now, a normal human being looking at this exclusion might justifiably think:  “This means that if the policyholder does something fraudulent, there’s no coverage.”  But insurance company claim departments don’t always act in a normal way.  Here, AIG contended that the exclusion applied if anyone committed fraud – even if that “anyone” was outside of the policyholder’s control.

Think about the precarious situation into which this put SS&C .  AIG is paying for the defense, but won’t engage in settlement discussions. So…do we settle and try to cut our losses?  Or do we roll the dice on a trial, since AIG is paying the lawyers’ fees?  Taking this one step further, what if a smaller company faced this issue?  SS&C has over 20,000 employees and might be able to fund a settlement, but what if the carrier took this position with a mom-and-pop operation?  This isn’t the way that insurance is supposed to work.

The court fortunately disagreed with AIG, writing: “The very rationale of such exclusionary provisions is that a tortfeasor may not protect himself from liability by seeking indemnity from his insurer for damages, punitive in nature, that were imposed upon him for his own intentional or reckless wrongdoing.” In other words, removing coverage for wrongful acts committed by others, not in the policyholder’s control, is somewhat ridiculous.

Meanwhile, the Eleventh Circuit (the appeals court that sits above federal district courts in Florida, Georgia and Alabama) also recently grappled with cyber-liability coverage, this time under a commercial crime policy.  The case is Principle Solutions Group v. Ironshore Indemnity, Inc., which you can read here. (The Principle Solutions case was handled by my friend Scott Godes, one of the leading experts in the country on insurance coverage for cyber-fraud, and an excellent attorney with whom I’ve worked in the past.  Scott was way out ahead of this issue when it first started to develop.)

Once again, a familiar fact pattern: The controller of Principle Solutions Group (an IT services firm) supposedly got an email from Nazarian, a managing director at the company. The email told the controller that Principle had been working on a “key acquisition,” and asked her to wire money “in line with the terms agreed… as soon as possible.” She would receive instructions from an attorney named Mark Leach, and the email told her to “treat the matter with the upmost [sic] discretion and deal solely with” Leach. “Leach” (what a great name in this context) sent remittance details for a bank in China. Wells Fargo asked the controller for verification that the wire transfer was legitimate. The controller confirmed, and $1.7 million disappeared into the scam-o-sphere.

The “Computer and Funds Transfer Fraud” section of Principle’s policy covered “loss directly resulting from  a fraudulent instruction directing a financial institution” to transfer or pay funds. The insurance company argued that there had been no “fraudulent instruction,” because the initial fraudulent email only asked the controller to work with a third party to wire funds later in the day, not to wire a specific amount of money to a specific recipient. Of course, the policy language doesn’t require that there be an instruction to wire a specific amount of money to a specific recipient, but I guess you can’t fault the carrier for trying. The Court held that the initial fraudulent email, combined with the later email from the supposed attorney, provided enough detail to constitute a “fraudulent instruction.”

The insurance company also argued that the loss did not result “directly” from a fraudulent instruction. Basically, the insurance company tried to get off the hook by blaming the controller for authorizing the transfer of funds when she should have known better. But the Court held that “directly” only requires “proximate causation,” a concept that has bedeviled law students forever. The Court essentially ruled that a “fraudulent instruction” necessarily contemplates that an unwitting employee will negligently transfer money, and that, under the policy language, that was good enough.

Although, after much time, expense and aggravation, the policyholders in these two cases eventually succeeded in obtaining recovery, the basic lessons here are clear. First, the key is to prevent these losses from happening in the first place. Do your employees know how to recognize a potentially fraudulent transaction? And second, although you may succeed in establishing coverage for cyber-losses under your basic business-owners’ policy, you’d be wise to explore stand-alone cyber-liability coverage with your broker or insurance advisor.  The average cost of that coverage is $1,501 per year per $1 million in limits, with a $10,000 deductible. Given the potential downside if you don’t have the coverage, it’s worth a look.