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.


In the “Cheese Shop” sketch from the old Monty Python comedy series, John Cleese plays a customer trying to buy some cheese from “Ye National Cheese Emporium, purveyor of fine cheese to the gentry (and the poverty-stricken too)”. The cheese shop proprietor, played by Michael Palin, seems to have no cheese in stock, not even common varieties like cheddar.  Cleese keeps trying, by asking for different and increasingly obscure types of cheese, but Palin only offers weak excuses like “Ohh! The cat’s eaten it.” Cleese remarks that it doesn’t seem to be much of a cheese shop, but Palin insists it’s the best around, due to its “cleanliness.” And Cleese replies: “Well, it’s certainly uncontaminated by cheese…”  (You can find the full sketch on YouTube.)

The policyholder in the recent case of Crum & Forster v. DVO found itself in a similar situation, and must’ve felt like it had bought an insurance policy uncontaminated by coverage.

DVO designs and builds equipment called “anaerobic digesters,” that create electricity from cow manure. (No, I’m not making this up.)  A company called WTE sued DVO, contending that an anaerobic digester sold by DVO failed to work properly, resulting in damages of over $2 million.

DVO quite naturally submitted the claim to its E&O carrier, Crum & Forster.  But C&F said “not our problem,” relying on an exclusion in the policy for breaches of contract.  DVO responded that C&F’s position improperly rendered the policy worthless, because any errors and omissions claim could arguably involve a breach of contract.  But the trial court held that, although coverage for professional malpractice would effectively fall within the breach of contract exclusion as to claims alleged by a client or customer, third parties could still bring tort claims against DVO that would not fall within the exclusion. So, according to the trial court, the policy had some value, and it would not be correct to say that the policyholder paid premiums for nothing.  Of course, claims by undefined “third parties” are not the main reason why companies buy errors and omissions insurance.  They’re primarily worried about claims by clients or customers.

This is why appeals courts exist. Federal courts are often no friend to policyholders, but even the Seventh Circuit recognized that C&F’s position meant that policyholders were paying for mostly worthless “protection” from errors & omissions claims.  The Court wrote: “[T]he focus…is not on the hypothetical third-party actions, but on the reasonable expectation of coverage of the insured in securing the policy. There is, after all, no reason to believe that DVO in purchasing Errors and Omissions coverage to provide insurance against professional malpractice claims had a reasonable expectation that it was obtaining insurance only for claims of professional malpractice brought by third parties.”

In short, C&F’s position rendered the coverage “illusory,” meaning that the exclusions to the policy would completely eviscerate the coverage.  The appeals court sent the case back to the trial court, with instructions to reform the policy to reflect DVO’s reasonable expectations.

A couple of observations about this. First, it is very difficult to convince a court, let alone a federal court, that an insurance policy contains “illusory” coverage. Courts will usually strain to find some type of claim that would be covered under the policy, which is what the trial court unsuccessfully tried to do here. But the “illusory coverage” argument is worth making if the carrier takes a position that makes the policy essentially worthless with respect to the types of claims that it’s really supposed to cover. Second, insurance policies are generally sold to people who aren’t insurance coverage lawyers or judges, and who do not have the time or experience to pull policies apart word by word and address arcane loopholes created by insurance companies.

In this regard, the late Justice Pashman of the New Jersey Supreme Court once wrote in a brilliant dissenting opinion:

“[General liability] insurance…is not issued to lawyers….As such, our central inquiry must be whether this policy is ambiguous insofar as the average [policyholder] is concerned — not, as the majority emphasizes, whether a jurist who had scrutinized the contract would experience any doubts as to the policy’s ambit… Moreover, the insurer could easily have avoided this ambiguity by utilizing ‘more  precise language [which]…would have put the matter beyond reasonable question.’”

That’s the truth.  And you can read the full decision in Crum & Forster v. DVO by clicking here.

If you’re involved in the legal business for any length of time, every once in a while, you’ll come across a case in which the facts are so horrible, and the result so seemingly wrongheaded, that you can’t help but feel that our entire system has failed. A recent decision from the Third Circuit, Arena v. RiverSource Life Insurance Co., which you can read here, sadly falls into that category.

Christine Arena was a successful in-house attorney for Time Warner. She had a wonderful family, with four healthy children, and was active in the Catholic Church and in her community, including serving as the President of a charitable foundation.

Because of some issues with anxiety, possibly caused by financial stress, Christine made an appointment to see a psychiatrist. The psychiatrist prescribed Klonopin and Zoloft.  These medications have the potential for serious side effects, including depression and suicidal thoughts and behaviors. There are also concerns that Zoloft can lead to anxiety and impulsivity. Christine’s anxiety didn’t abate, so the psychiatrist increased the dosage, and added another antidepressant to the mix.

Christine continued to work, but not long after being prescribed the drugs, and when her family was not home, she took two of her husband’s leather belts, wrapped them around her neck, and hanged herself.  She was discovered by her eleven-year-old daughter. She died nine days later. The police report listed the incident as a suicide attempt, and the medical examiner listed her manner of death as suicide, although neither the police nor the M.E. made any inquiry into her state of mind.

Christine had two life insurance policies from RiverSource, but both contained a suicide exclusion clause.  The clause in one of the policies, for example, provided: “If the insured, whether sane or insane, dies by suicide within 2 years from the Policy Date, our liability is limited to an amount equal to the total premiums paid.” The other policy contained a similar clause.

The insurance company denied coverage, based on the suicide exclusions. Christine’s husband Gianfranco then filed suit in state court, and the insurance company promptly removed the case to federal court (of course), which is generally considered to be a more hospitable forum for carriers.

The federal court granted summary judgment to the insurance company, and the ruling has now been affirmed by the appeals court. This is so, despite the fact that New Jersey law requires, as an element of suicide, that the decedent had an actual intent to end her life. Here, Mr. Arena had expert medical evidence that Christine suffered from a medication-induced disorder that altered her state of consciousness to the point that she was unable to understand the consequences of her actions. He also had testimony from Christine’s treating physicians, who confirmed that, because of the ill effects of the drugs, Christine was not capable of understanding the consequences of hanging herself. Lastly, Mr. Arena had testimony from Christine’s family, friends and colleagues, all of whom said that she would never have intended to end her own life had she been thinking clearly.

Soviet dictator Josef Stalin once supposedly said:  “It is enough that the people know there was an election. The people who cast the votes decide nothing. The people who count the votes decide everything.”  Which is another way of saying, you may think you have a decent case.  But the only thing that matters is who’s really making the decision.

In the view of the federal appeals court judge, the medical evidence was not “legally material,” so there was no need to allow a jury trial. The Court wrote: “The parties do not dispute that Christine took two of her husband’s leather belts, moved a chair from another bedroom into a bathroom, fastened the belts together and wrapped one around her neck, and arranged the belts in a manner to effect a hanging. Nor do they dispute that she in fact stepped off the chair and hanged herself. These actions are sufficient circumstantial evidence to establish not only that Christine had ‘awareness’ that those actions would end her life but also that she intended to do so.”

They are?  That seems circular.  The question isn’t whether she did those things.  The question is whether she consciously knew what she was doing.  In my non-judicial opinion, a jury should have been allowed to assess the credibility of the medical evidence.  I note that the Court waited until page 11 of a 12-page decision to write, dismissively:  “True enough, in actions for insurance benefits, the insurance company bears the burden of proving that an exclusion to coverage applies.”

As someone who’s practiced in New Jersey for 30 years, I can tell you that a state court judge would’ve been far more likely to allow this case to go to a jury.

I obviously do not wear judicial robes, and I mean no disrespect to the highly regarded federal judge who wrote the opinion. But we are all a product of our experience and background.  Here, the judge was a former prosecutor, and also, while in private practice, a Delaware corporate lawyer who had specialized in intellectual property law.  He was appointed to the bench by President Bush in 2006.  In short, someone who may not be fond of gray areas.   And, sadly for Mr. Arena and his children, getting a federal appeals court decision overturned is nearly impossible.

The bottom line is this. Insurance companies want to litigate their claims in federal court for a reason. The judges there tend to be more conservative and more insurance-company-friendly. (That is not even remotely suggesting that anything improper took place here.  I am only saying that judges are people too, and they have a worldview that informs their decisions.) Any time you allow a judge or jury to decide your case, whether in state court or federal court, though, you’ve just given up control of the matter, and you have no idea what will happen. So, if you can settle a claim, you should seriously think about it. Some claims, like this one, are difficult to settle, because the insurance company knows it has no real financial incentive to compromise. The carrier figures, from an economic perspective, why not file for summary judgment, which will likely be granted, and if we lose, then we can talk settlement?  But as a policyholder, you should still try to push settlement talks at the appropriate time.   See whether you can get the numbers into a range where you have a decision to make.

I know that’s unfair. You paid for the coverage.  Why should you have to compromise?

But it’s the real world.

Because most people think that insurance law is about as exciting as watching grass grow, I try to be somewhat entertaining in these posts. Probably I usually fail, but at least I keep myself amused.

If there’s one thing that we wannabe comedians hate, though, it’s being upstaged. I was recently reading a decision from a federal appeals court in a case called Sterngold Dental, LLC v. HDI Insurance Company, and the judge who wrote the opinion apparently felt that he, too, needed to entertain.  The case involved a business insurance claim by a dental products manufacturer named Sterngold.  The Court, in denying coverage, wrote things like:

“This appeal gives us an opportunity to sink our teeth into a sophisticated insurance coverage question.”

“Concluding, as we do, that Sterngold’s arguments lack bite…”

“Sterngold fights tooth and nail…”

“Reality has sharp teeth…”

Stop, Your Honor, you’re killing me. No, really, please stop.

Actually, I admit that the tooth references are inventive.  But the policyholder probably didn’t find them entertaining at all.  I pause here to note that the judge who wrote the opinion spent 15 years in private practice with a major law firm that represents insurance companies. There’s nothing wrong with that, of course, but judges are people too, and they may gain their point of reference through their life experience.

The case involved the following facts. A competitor of Sterngold, called Intra-Lock, contended that Sterngold had infringed a trademark called “OSSEAN,” which related to a dental implant coating product. The relevant policy, sold by HDI Global, contained coverage for “personal and advertising injury.” (The judge in the case, like most judges, uses the word “issued” instead of the word “sold.”  “Issued” is such an insurance company word. It suggests that the carrier was doing a favor as opposed to selling you a product.)

Basically, “advertising injury” coverage insures against the following offenses in connection with the insured’s advertising of its goods or services: libel, slander, invasion of privacy, copyright infringement, and misappropriation of advertising ideas.

Sometimes, the policies define “advertising” or “advertising idea.”  Sometimes, they don’t, leading to a reasonable conclusion that, for coverage purposes, “advertising” means any kind of publicity or solicitation. Here, Intra-Lock had alleged that Sterngold “acquired value, name and brand recognition, and goodwill in the OSSEAN mark as a result of continual and substantial advertising,” including the use of confusingly similar marks.  In the coverage litigation, Sterngold reasonably argued that Intra-Lock’s claims were therefore for misappropriation of advertising ideas, within the meaning of the policy.  The Court struggled with that concept, speculating that the OSSEAN mark could be considered an “advertising idea,” but that it could also be deemed to be a reference to the product itself.  I’m not sure that’s a distinction with a difference, but ultimately, the Court punted the issue and, for purposes of the decision, assumed that the “advertising injury” coverage had been triggered.

The far thornier issue, from Sterngold’s perspective, was an intellectual property exclusion contained in the policy, which read:

“This insurance does not apply to: . . . ‘Personal and advertising injury’ arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights. Under this exclusion such other intellectual property rights do not include the use of another’s advertising idea in your ‘advertisement.’”

The Court held that the IP exclusion was a valid basis for denial of claim.

The problem here is that second sentence of the exclusion is as clear as mud.  Sterngold argued that, under the second sentence, since the alleged infringement of Insta-Lock’s advertising idea was excepted from the exclusion, coverage should exist.

In response, the Court engaged in some verbal gymnastics, writing as follows: “The first sentence of the IP exclusion lists a series of IP-related claims, including trademark infringement. Each specifically articulated claim is separated from the next by a comma. The list concludes with the catchall phrase ‘or other intellectual property rights.’ This syntax, combined with the use of the disjunctive ‘or,’ clearly differentiates the listed IP-related claims from the catchall phrase ‘other intellectual property rights.’”

You can see how ludicrous this exercise becomes. No policyholder, when placing coverage, is going to go through policy forms with a magnifying glass and a book of grammar to try to figure out what is and isn’t covered.  (Only judges and insurance company claim personnel have that luxury, usually after-the-fact.) By making the policy forms so complicated, insurance companies give Courts the ability to find holes in coverage that the policyholder could never even have imagined.

When clients or potential clients ask whether their coverage is sufficient to protect their business, I always tell them the same thing:  You’re looking at the problem the wrong way. An insurance policy provides you with the right to sue an insurance company. That’s why risk management, in the sense of minimizing the chance that problems will ever occur, is so critically important.

But it’s also important to try to negotiate IP exclusions out of your policy.

You can sink your teeth into the Sterngold Dental decision by clicking here.

In Billy Wilder’s 1944 film noir masterpiece, “Double Indemnity,” Phyllis Dietrichson (Barbara Stanwyck) seduces insurance agent Walter Neff (Fred MacMurray) into murdering her husband to collect on his accident policy. (Who knew insurance could be so seedy?)  The suspicious and relentless claims adjuster, Barton Keyes (Edward G. Robinson), eventually gets to the bottom of the scheme, and along the way, delivers a great (and hilariously overdramatic) movie speech about the important role his job plays:

“Desk job? Is that all you can see in it? Just a hard chair to park your pants on from 9 to 5? Just a pile of papers to shuffle around and five sharp pencils and a scratchpad to make figures on? Maybe a little doodling on the side? Well that’s not the way I look at it, Walter. To me, a claims man is a surgeon. That desk is an operating table and those pencils are scalpels and bone-chisels. And those papers are not just forms and statistics and claims for compensation. They’re alive. They’re packed with drama, with twisted hopes and crooked dreams… A claims man is a doctor and a bloodhound and a cop and a judge and a jury and a father confessor all in one.”

(You really have to read this speech in an Edward G. Robinson gangster voice to appreciate it fully.  Maybe after an adult beverage or two.)

It’s certainly true that a claims adjuster’s desk is (metaphorically speaking) an operating table.   The problem is that, in many instances, the “surgeon” is trying to remove the very heart from your claim. I once had a life insurance case, for example, in which a young husband went on a mountain climbing trip. There was an unexpected and tragic avalanche, and he and his party were all lost, as confirmed by the authorities. When his widow put in a claim,  though, the insurance company responded by saying, in essence: No dead body, no benefits.   Fortunately, we were able to persuade the carrier of the error of its ways without filing suit, but you can see what we’re sometimes up against.  (The most amazing thing to me about that case is that a supervisor actually signed off on the denial letter.)

There’s a concept in insurance known as “post-loss underwriting,” and it’s generally considered to be unsavory if not downright illegal.  The idea is that the carrier will gladly sell you a policy and take your premium.  Just don’t file a claim, ever.  When you do, the claims department will go through the policy application and your background with a fine-toothed comb, generally making you feel like a criminal and looking for a basis to avoid paying on the ground that you were never entitled to be insured in the first place. It’s as though you were in Atlantic City playing blackjack, and every time you got to 21,  the dealer could refuse to pay and tell you that you must’ve been cheating.  And one really infuriating thing about post-loss underwriting is the number of judges who unknowingly tolerate it.

I’m not saying that’s what happened in the recent New Jersey Supreme Court case of Sun Life v. Wells Fargo Bank (really), but the asserted basis for the decision gives pause to those of us who do policyholder-side work. The case involved a $5 million insurance policy on the life of a retired middle school teacher named Nancy Bergman. The application listed the “Nancy Bergman Irrevocable Trust” as the sole owner and beneficiary of the policy.  Ms. Bergman’s grandson, Nachman Bergman, was the Trustee, and the Trust had four additional members, all of whom were strangers to Ms. Bergman. The investors paid the premiums, and the trust agreement provided that any benefits would be paid to Nachman.

About five weeks after Sun Life sold the policy, Nachman resigned as Trustee and appointed the four investors as co-Trustees.  The Trust later sold the policy for $700,000, and after a series of other transactions, Wells Fargo obtained ownership of the policy and continued to pay the (substantial) premiums, which, of course, Sun Life gladly accepted.

Ms. Bergman passed away in 2014 at age 89, and, naturally, the trouble soon began. Wells Fargo, as the now-owner of the policy, filed a claim for the paid-for benefits.  According to the Court, Sun Life then “investigated” and discovered terrible “discrepancies” concerning who actually owned the policy,  leading Sun Life to do the only morally responsible thing:  Deny the claim, of course! After all, how could Sun Life possibly pay what it owed?  It would be unlawful!  Immoral! Why, by paying these benefits, Sun Life would be grossly encouraging people to bet on the lifespans of total strangers! (As if insurance companies don’t do exactly that every day.)  The very ethical structure of our society would collapse!

Now, if I were a judge (which I’m not, and never will be, especially after writing this), I would say, let me get this straight.  You, Sun Life, conducted an underwriting process, collected information, and decided to sell a policy to insure Ms. Bergman’s life.  You collected large premiums for several years, and you saw that the checks or transfers were no longer coming from Ms. Bergman or the Trust, but from other entities, including Wells Fargo.  While you were reinvesting the buckets of premiums you collected and making a profit on them, you never asked any questions about the ultimate beneficiary.  Now Ms. Bergman has passed away, and you’re denying the claim on the ground that Wells Fargo had no “insurable interest” in Ms. Bergman’s life.

Why is that not the very definition of improper post-loss underwriting?

But, as I said, I’m not a judge, and our Supreme Court looked at the situation very differently, holding that the policy was essentially an illegal “STOLI” scheme.  No, not the vodka…but a concept known as Stranger-Originated Life Insurance.  The Court held that for an insurance policy to be valid, the beneficiary must have an “insurable interest” in the covered risk. An insurable interest includes, among other things, an interest in the “life, health and bodily safety of another individual to whom [the beneficiary] is closely related by blood or by law and in whom he has a substantial interest engendered by love and affection.” The Court held that the investors in the life insurance policy had no interest in Ms. Bergman remaining healthy, and instead were essentially gambling on the length of her life, in the hope that she’d die soon, allowing them to collect the death benefit. The Court wrote: “If a person with an insurable interest takes out a policy because he has an agreement to sell it to a third party, the transaction could be as much of an attempt to circumvent the insurable interest requirement is if a stranger had funded the policy at the outset.”

The Court also noted that the New Jersey Department of Banking and Insurance (DOBI) had submitted a brief supporting Sun Life in the case, arguing that “it is against the public policy of New Jersey for a third party to procure a life insurance policy from a life insurance company with the intent to benefit persons without an insurable interest in the insured.”

The takeaway is that, if you’re using a life insurance policy for estate planning purposes or in connection with corporate transactions, you need to be sure that the policy doesn’t run afoul of the STOLI rules as established by the relevant law.

Personally, I think the STOLI rules are downright silly. Insurance is an industry that essentially functions on gambling; carriers are forever betting on the probabilities of someone living, dying, or becoming ill. Apparently, this is a one-way street, however. As far as DOBI protecting the policy-holding public, in my view, the less said, the better.  If you’re supposedly there to help ensure fairness in the insurance market, it’s difficult to articulate a valid reason why, if an insurance company has collected millions of dollars in premiums over period of years, it shouldn’t be held to the terms of the contract it sold, instead of inventing reasons not to pay. But so it goes.

You can read the full decision here.

“Now the flood was on the earth forty days. The waters increased and lifted up the ark, and it rose high above the earth. The waters prevailed and greatly increased on the earth, and the ark moved about on the surface of the waters.” [Genesis 7:17.]

I’m guessing that people didn’t have flood insurance in the times of Genesis.  Many people and businesses don’t have it now. The problem is, if water is involved in an insurance claim in any way, and you don’t have specific flood insurance, guess what the insurance company is going to try to argue?  (Specific flood insurance often has limits that aren’t equal to the task anyway, unless you’ve bought excess flood coverage.)

Standard homeowners and business insurance policies generally don’t cover flood damage.  They’ll cover some damage from rain, but if your home or business is filled with water as a result of rising water from lakes, rivers, streams, or the ocean…you have a potentially big problem.  (Remember Sandy?)

But just because water is involved doesn’t mean the inquiry is over.  Don’t take no for an answer. Dig through the policy language and ask whether there’s any way that your problem may not fall within the specific terms of a flood or water damage exclusion. Remember, as the policyholder, you’re supposed to get the benefit of the doubt.  (Judges sometimes forget that, but it’s pretty clear law.) (Also…buy flood insurance.)

In Sosa v. Massachusetts Bay Insurance Company, for example, the New Jersey Appellate Division recently found that the carrier’s reliance on a water damage exclusion was, well, all wet. (You can read the decision here.)  The case involved a ruptured water main that caused a flood into the policyholder’s garage and basement apartment. The carrier’s adjuster inspected the property and concluded that the damage resulted from “surface and ground water intrusion.” The policy excluded losses caused by “water damage,” so the carrier disclaimed. The trial court agreed with the insurance company and dismissed the policyholder’s case.

One of the problems was that, at deposition, the policyholder testified that “There was a flood and there was damage to my home.” Insurance is a word game.  Be careful. This statement happened in a deposition, but sometimes it happens when the claim is phoned in to the insurance company claims department (sometimes on a recorded line). You’re better off having your broker or insurance coverage lawyer make the claim so you don’t inadvertently give the insurance company ammunition for a denial.

The carrier’s own policy language, though, defined flood as “a general and temporary condition of partial or complete inundation of normally dry land areas.” A water main break involves localized damage, not a “general and temporary condition of partial or complete inundation,” and doesn’t qualify. The flood exclusion was therefore ambiguous, and had to be construed against the carrier.

The policy also didn’t define “surface water.” Looking to New Jersey statutes and regulations, however, the Court found that “surface water” has “a permanent nature, akin to a body of water.” A water main break doesn’t meet the standard. As for water below the surface of the ground, the water main break didn’t qualify as that, either.  The Court wrote: “Simply put, the water that damaged plaintiff’s home was no longer ‘below the surface of the ground’ when it reached his property; it was above ground.”

The Court noted the insurance company’s sneaky insertion of the water damage exclusion into an endorsement dealing with sump pumps, writing: “An endorsement with no title at all would have been less problematic than the one employed here.”

Because there were unresolved factual issues as to the amount of the covered damage, the case was remanded to the trial court for further proceedings.

The bottom line is that insurance companies often perform superficial factual investigations and then attempt to fit claims within exclusions that may not necessarily apply. The squeaky wheel sometimes gets the grease, as the old saying goes.

This case was handled on the policyholder side by Jeffrey Bronster, a former prosecutor, whose background is here. To succeed on a complicated insurance claim, unfortunately, you may need a prosecutor’s relentlessness.

There’s a very true old quote about interpreting insurance policies that I (and other policyholder lawyers) like to cite.  It goes: “Ambiguity and incomprehensibility seem to be the favorite tools of the insurance trade in drafting policies. Most are a virtually impenetrable thicket of incomprehensible verbosity…The miracle of it all is that the English language can be subjected to such abuse and will remain an instrument of communication.” Universal Underwriters Ins. Co. v. Travelers Ins. Co., 451 S.W.2d 616, 22-23 (Ky. 1970).

Unfortunately, although most insurance policies are a complicated and incomprehensible mess, Courts aren’t always going to help untangle the thicket, especially if a policy exclusion is noted on the schedule of exclusions in ALL CAPS.  An unfortunate plaintiff recently learned that the hard way in Evanston v. A&R Homes, which you can read here.

Sharkey was a worker for a company called YVPV Construction. A&R is a general contractor that got hired to build a four-story, three-unit apartment building in Jersey City. A&R brought in YVPV as a subcontractor. Sharkey was working on the site when he fell 20 feet and hurt himself. This being America, litigation ensued. Sharkey filed a complaint against the property owner, A&R and its owner (Aponte), and the property management company, for negligence.

Evanston had sold liability coverage to A&R.  Following the declarations page of the policy was a schedule of attached forms. One of the forms was listed as: “EXCLUSION – EMPLOYER’S LIABILITY AND BODILY INJURY TO CONTRACTORS OR SUBCONTRACTORS.”  The purpose of the noted exclusion seems pretty clear, since it removes coverage for “bodily injury” to any “contractor or subcontractor while working on behalf of any insured,” including any employees of “of such contractor or subcontractor.” Uh-oh.

A&R tendered the claim to Evanston, and Evanston agreed to defend under reservation of rights, citing the subcontractor exclusion. Once Evanston figured out that Sharkey had been employed by YVPV (the sub), Evanston filed a complaint seeking a Court ruling that it was no longer obligated to defend the case.

Now, here’s an interesting phenomenon that I sometimes experience with even seasoned businesspeople. Instead of hiring an attorney to defend the declaratory judgment action brought by Evanston to get out of coverage, all of the defendants (including A&R) apparently dumped the complaint into the “circular file,” as a result of which Evanston got a default judgment negating coverage. Sharkey, who also received notice of Evanston application for default judgment, didn’t bother to oppose.

Several months after the default judgment got entered, Sharkey demanded discovery from Evanston about the available coverage. Evanston responded with a summary judgment motion, in part on the ground everyone had defaulted. The Court told Sharkey, sorry, that train has left the station. And the Court went on to say that, even if there hadn’t been a default judgment, there would be no coverage.

Sharkey argued that he had a reasonable expectation of coverage, because the declarations page of the Evanston policy didn’t refer to any exclusion limiting the typical broad general liability coverage. He also argued that the subcontractor employee exclusion was ambiguous, because the title of the exclusion (“Employer’s Liability”) suggested that the provision only excluded A&R’s workers compensation liability.

Here’s where this gets interesting. The Court cited case law involving car insurance for the proposition that if an exclusion isn’t  clearly noted in the declarations page it shouldn’t apply, writing: “We deem it unlikely that … the average automobile policyholder would… undertake to attempt to analyze the entire policy in order to penetrate its layers of cross-referenced, qualified and requalified meanings.”

In rejecting Sharkey’s claim, though, the Court wrote: “A&R’s insurance broker obtained the Evanston policy and was familiar with commercial liability insurance, unlike the average, unversed automobile policyholder, who is likely to rely on the declarations page.” The Court also noted that, while the declarations page may not have clearly identified the exclusion, the form attached to the policy identified the exclusion in ALL CAPS.

A couple of takeaways from this.

First, the judge-made fiction that using a broker to obtain coverage somehow transforms businesspeople into sophisticated insurance experts who deserve less coverage is, of course, ridiculous. But it does show that, if you’re in business, you can’t afford to put your head in the sand. You should at least review the list of exclusions and the declarations page to make sure that you’re comfortable with the apparent coverage, and, if you have questions, you should raise them with your broker. Parenthetically, cases like this are the reason the insurance industry has successfully lobbied for a new law in New Jersey (which almost certainly will be signed by the Governor), providing that brokers and agents will no longer be held to a fiduciary standard, but rather, only to a standard of ordinary care.  You can read about that here.

And second, if you receive a summons and complaint (or a subpoena), PAY ATTENTION. Putting it in a drawer and hoping it will magically go away is rarely an effective strategy.

The great American humorist and writer Ambrose Bierce (1842-circa 1914) published a famous work called “The Devil’s Dictionary,” in which he provided astute (if sardonic) definitions of many common terms in the English language. Bierce defined “insurance” for example, as “An ingenious modern game of chance in which the player is permitted to enjoy the comfortable conviction that he is beating the man who keeps the table.”

I’m thinking of starting “The Devil’s Dictionary: Killian Edition,” in which “federal court” will be defined as “A place where insurance claims go to die.”  That can be especially so when water is involved, in any way.

A recent decision, Villamil v. Sentinel Ins. Co. (which you can read here), involved water damage to a nail salon in Princeton.  Apparently (at least according to the Borough Engineer), a major rainstorm caused a floor drain in an exposed exterior stairwell to fail outside the salon, resulting in water backing up into the salon itself. Of course, since the outside stairwell was exposed to the elements, rain also apparently contributed to water in the stairwell.

The salon owner’s property insurance coverage generally excluded damage caused by flood, but provided coverage for “physical damage to Covered Property solely caused by water that backs up from a sewer or drain.”  (Emphasis mine.) The policy also stated:


We will not pay for water or other materials that back up from any sewer or drain when it is caused by any flood. This applies regardless of the proximity of the flood to Covered Property. Flood includes the accumulation of surface water, waves, tides, tidal waves, overflow of steams or other bodies of water, or their spray, all whether driven by wind or not that enters the sewer drain system.  (Emphasis mine.)

When the damage happened, the salon owner, Tere Villamil, called her carrier (Sentinel) to report a claim, and spoke to a claim representative on a recorded line. Insurance, unfortunately, is a word game, and most businesspeople have no experience in how it works. Instead of referring to the problem as “water damage,” Villamil stated: “We have had a flood in our lower level yesterday that was quite awful.” Upon hearing the magic word “flood,” the claim representative began asking pointed questions to continue to “cement” the loss into the exclusions, such as: “And you said it was a flooding, correct?”

Naturally, the carrier denied coverage, and just as naturally, the trial court parsed the language of the policy to find support for the denial.

First, the Court held that “to acquire coverage, Plaintiffs must show that the salon sustained damages ‘solely’ from water that backed up from a sewer or drain…Stated differently, Plaintiffs bear the initial burden of demonstrating that floodwater did not, in any way, contribute to the damages which the building sustained.” (Emphasis mine.) The Court held that the policyholder had not sustained its burden, in part because “the water which accumulated at the bottom of the stairwell, at a minimum, included surface water which subsequently entered the premises through the salon’s glass door.”

I love the use of the words “acquire coverage” in the opinion, because they show the mindset of the Trial Court in analyzing the problem:  Insurance (as Bierce said) is a game of chance, and, in order to get what you paid for, you have to play your cards correctly.  Otherwise, the house wins.

Of course, the policy does not “in any way” use the words “in any way.” The more appropriate inquiry is, was any of the damage caused only by the water that backed up from a sewer or drain? (The Borough Engineer said yes, because rainwater had overwhelmed the capacity of the drain.) The Court’s interpretation of the language instead seems to create a difficult standard that, if one drop of “flood” water contributed to any of the damage “in any way,” there’s no coverage.  That can’t be what a policyholder would reasonably expect.

Second, the policy stated that a “flood” included “surface water.” In constructing its finding of no coverage, the Court helpfully inserted a definition that does not appear in the policy, concluding that “surface water” means “waters on the surface of the ground, usually created by rain or snow, which are of a casual or vagrant character, following no definite course and having no substantial or permanent existence.” The Court held that since “flood,” as defined by the policy, includes “the accumulation of surface water,” and since rain landed on the exposed steps and created “surface water,” there was no coverage.

Of course, Webster’s defines “surface water” to mean “natural water that has not penetrated much below the surface of the ground.”  Here, the water did penetrate beneath the surface of the ground, because it entered subsurface drainage pipes and then backed up when the drain failed.

Finally, the Court relied upon an anti-concurrent causation clause, reading:  “We will not pay for loss or damage caused directly or indirectly by [flood]. Such loss or damage is excluded regardless of any other cause or event that contributes concurrently or in any other sequence to the loss.” According to the Court, this clause excludes “all coverage for a loss occasioned by a flood, even when a flood acts concurrently or sequentially with a covered peril, such as sewer backup.”

Of course, this means that sewer backup would never be covered if it causes a “flood,” which then causes damage.  So, apparently, the policy only covers sewer backups that somehow do not involve water.  I suppose if your drain starts spewing cannellini beans, though, you’re good to go.

So where does this leave us?  The obvious point is, don’t rely on your general property coverage to protect you from water loss.  Given the impenetrable thicket of exclusionary language (with pro-carrier definitions to be inserted by the Court!), it probably won’t.  Buy flood coverage, and ask about excess flood coverage if the risk is severe enough.  Also, despite what cute little green lizards with British accents or “Mr. Mayhem” would have you believe on TV, insurance claims people are not your friend.  If a loss is substantial, it would be better to allow your insurance consultant or lawyer handle the claim, so you don’t inadvertently give the carrier the words to support a claim denial.  If the unfortunate policyholder here had not used the word “flood,” but instead simply said that water had backed up from a drain and gotten into the salon, things might’ve turned out differently.  Maybe.