Some Words Are More Equal Than Others: BancInsure vs. FDIC
By Alex Lathrop and Harry Moren
In George Orwell's "Animal Farm", the governing principle that "all animals are equal" was revised by the pigs, who had ascended into power, to "all animals are equal, but some animals are more equal than others." A recent decision by the Tenth Circuit (applying Kansas law), BancInsure Inc. v. Federal Deposit Insurance Corp., appears to apply a similar principle of insurance policy interpretation, finding that the plain meaning of one policy provision may trump the equally plain meaning of another conflicting provision. This is a departure from well settled rules governing how courts interpret insurance policies. Among those rules are that where there is no ambiguity, courts are to apply a provision's plain and ordinary meaning. However, courts are to read the policy as a whole and cannot interpret one policy provision (even if it is clear) in a way that would render another provision meaningless (because all words in a policy are equal). Where the plain meaning of two or more policy provisions conflict, the policy is ambiguous and the court must adopt a reasonable reading that favors coverage. Instead of employing these rules to resolve an ambiguity in the directors and officers policy at issue, the court in BancInsure gave effect to one provision that excluded coverage, even though doing so required it to disregard another clear provision that would have allowed coverage—effectively deciding that "all words are equal, but some words are more equal than others."
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Cutting the Long-Tail: UK vs. US Insurance Insolvencies
By Mark Plumer, Thomas Welsh and Matthew Jeweler
The universe of U.K. insurers still available to pay long-tail liability claims (e.g., asbestos, pollution and other health hazards) is getting smaller every year. Significant domestic insurers like The Home, Midland and Mission went into receivership in the U.S. years ago. Significant London market companies continue to fade away, depriving policyholders with historic London market policies the opportunity to fully collect upon claims made and satisfied under those policies.
On Oct. 28, a United Kingdom court will hold a hearing regarding whether to approve an amended scheme of arrangement involving certain London market companies that are currently in "run-off" (meaning their only function is to pay claims until their assets are gone). The proposed amended scheme would "crystallize" these companies' liabilities—a euphemism for "cutting the tail" on their long term exposures by judicial decree. If the amended scheme is approved, a "bar date" will be set after which, subject to certain exceptions, policyholders will not be able to submit new claims against those companies.
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Blog Highlights
Wire Transfer Approved, Insurance Coverage Denied
by Russell Cohen, Andrew Ardinger and Richard Gallena
Cyber criminals posing as company executives have successfully made off with millions from company coffers by tricking company employees into sending them the cash. Insurers are increasingly taking the position that this type of fraud is not covered under cybercrime policies.
As we recently discussed in a client alert, in a "Business E-mail Compromise" or "BEC" scam, criminals identify and target employees at a company who are responsible for transmitting the company's money. An impostor then poses as a high-level executive and contacts a mid-level employee via e-mail, directing that employee to transfer company funds to an external bank account (that is usually overseas). By the time the employee—or the company—realizes that this "boss" is not his or her actual boss, the funds are long gone. According to the FBI, BEC scams have claimed nearly 2,000 victims and almost $215 million since 2013. While it would seem that the losses stemming from such a scam should fall squarely within a company's cybercrime policy, insurance companies may disagree.
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Ganders Beware! Policy ADR Clauses Will Be Enforced Against Insureds and Insurers By Dismissal of Litigation
by David Klein
Recently we warned about mandatory arbitration provisions proliferating in insurance policies, which require referral of coverage disputes to an arbitrator or arbitral panel and bar commencing civil lawsuits to resolve insurance coverage disputes. Other policies require the exhaustion of alternative dispute resolution (ADR) procedures, such as mediation, before a coverage action may commence. On July 17th, a federal judge in the Northern District of California enforced such an ADR provision against an insurer that sued its policyholder for a declaratory judgment on coverage.
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Don't Get Burned: Tips for California Companies Facing Increased Risk of Wildfires
by Mark Plumer, Peri Mahaley and Richard Gallena
California is in the midst of one of the worst droughts on record. In January 2015, Governor Jerry Brown issued an executive order that requires cities and towns to reduce water use by 25%. The $45 billion agriculture industry was spared from the mandatory water reduction, but nonetheless, the drought is expected to cause $2.7 billion in agriculture industry losses.
An important additional threat to California's economy is the increased risk of wildfires following from both the drought and the water use controls. Over recent decades, wildfires have caused massive damage in California. According to one study, California is home to "[m]ore than 80% of all wildfire insured losses in the period 1980–2011 and the five costliest wildfire events for the insurance industry[.]"
The current drought conditions have created an even greater risk of catastrophic wildfires. The insurance industry recently warned that "the potential for wildfire has reached a peak that could cause $237.3 billion in property damages in high-risk areas." This risk is exacerbated by commercial and residential development in rural areas that are more prone to fires than urban areas. And as of July 11, 2015, the California Department of Forestry and Fire Protection recorded almost 1,000 more wildfires than during the same time period in 2014.
Considering these depressing statistics, it is important for companies to manage their wildfire exposure by maximizing insurance coverage, to the extent practicable; obtaining as much coverage for wildfires as is possible in current policies; remaining alert to proposed changes in their insurance programs; and scrutinizing coverage available through subcontractors.
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California Supreme Court Finds That Insurer Can Recoup Excessive Fees from Policyholder's Independent Counsel
by Celia Jackson
The California Supreme Court ruled recently that Hartford Casualty Insurance Company can recoup payment of allegedly unreasonable and excessive fees it paid to the policyholders' independent defense counsel from counsel itself, rather than from its policyholder. The Court acknowledged that the facts of the case before it were "unusual" and that its holding was narrow and limited to those facts.
The dispute arose after Hartford denied a defense to its policyholders, which were sued for various business-related torts. The policyholders initiated coverage litigation and obtained summary adjudication that Hartford owed a duty to defend and, because of its reservation of rights, was required to pay for independent counsel to represent the policyholders.
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Indemnification Claim Extinguishes Fire Caused by Insured v. Insured Exclusion
by Darren S. Teshima, Alison Roffi and Jacquelyn Hehir
The Fifth Circuit recently delivered good news to policyholders in a July 27, 2015 opinion that supports the argument that an indemnification right among co-insured parties may be covered, notwithstanding the insured-versus-insured exclusion. In Kinsale Insurance Co. v. Georgia-Pacific LLC, the indemnification right prevailed because the claim for which coverage was sought was for an indemnification request, not for the underlying property damage arising from a fire.
Georgia-Pacific hired Advanced Services, Inc. to demolish a plywood plant. Advanced Services, in turn, leased equipment for the work from H&E Equipment Services ("H&E"). When a fire in the plant damaged this equipment, H&E brought sued Advanced Services, which, in turn, brought a third-party demand for indemnification against Georgia-Pacific. Advanced Services held a Commercial General Liability policy issued by Kinsale Insurance Company, under which Georgia Pacific was an additional insured. The policy contained an insured-versus-insured policy exclusion that provided, in relevant part: "This insurance does not apply to claims or 'suits' for 'bodily injury,' 'property damage' or 'personal and advertising injury' brought by one insured against any other insured."
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