The Sharon Academy v. Massachusetts Bay Insurance Company, et al., Vermont Superior Court, Docket No. 442-7-13 Wncv (Feb. 25, 2015).

Relevant Facts:

Student goes on a study-abroad program in India (“Program”) sponsored by a Vermont school (“School”). The program is run and managed by a coordinator (“Coordinator”), and has both U.S.-based and Indian national employees in India.  Shortly after arriving, the student claimed that she was sexually assaulted by one of the Indian national employees of the program. Eventually the student files a lawsuit against the school and the coordinator in Vermont (“Underlying lawsuit”).  The underlying lawsuit alleges that the school and the coordinator were negligent in hiring and supervising the Indian national who (allegedly) assaulted the student. The school refers the claim to its insurer (“Insurer”). The insurer denies coverage under both a primary CGL policy and an umbrella policy. The insurer contends that the alleged assault occurred in India, which is not within the “coverage territory” of the CGL policy. Therefore, there is no coverage under that policy or under the umbrella. The school then sues the insurer for breach of contract and bad faith and, in the alternative, sues its insurance broker for failing to procure coverage. The school moves for summary judgment against the insurer, requesting a determination that the underlying lawsuit is covered. The insurer cross-moves for:  1) a determination of no-coverage, 2) to strike the school’s bad faith claim, and 3) for a determination that if it is required to cover the underlying lawsuit, it can choose defense counsel, rather than having to retain defense counsel of the school’s choosing.  The court granted the school’s motion, finding that the underlying lawsuit is covered under both the CGL and umbrella policies; that the insurer breached the policy by refusing to defend; and that the insurer must reimburse the school for reasonable defense costs incurred to date. However, the court rules that the insurer can retain defense counsel of its own choosing.

Here is a brief review of the court’s decision:

The primary CGL policy:

The court begins by citing and quoting cases that stand for the long-standing principles that if the claims in the underlying suit might be covered by the policy, the insurer must provide a defense, and that any ambiguities in the policy will be construed in favor of coverage.

The court notes that the policy includes a sexual molestation endorsement that includes the disputed “coverage territory” language. The sexual assault alleged in the underlying lawsuit describes injury that comes within the endorsement. The issue is whether the assault occurred within the “coverage territory.”  “Coverage Territory” in the endorsement is the United States, but also “all other parts of the world if the injury or damage arises out of the activities of a person whose home is in the U.S. but who is away for a short time on the insured’s business.” Thus, more specifically, the issue is whether the alleged assault arose out of the activities of a person whose home is in the U.S. but who was in India on the school’s business.  

Acknowledging that the “coverage territory” term of the policy has apparently not been litigated in Vermont and has been little-litigated elsewhere, the court concludes that there is coverage because the alleged sexual assault arose out of the student’s activities, and she lives in the U.S. but was in India for a short time on the school’s business.  

The court then rejects the insurer’s argument that the “coverage territory” definition above refers only to the alleged assaulter, i.e., the Indian national employee of the program.  The insurer argues that it was the assaulter’s, and only the assaulter’s, activities that specifically “caused” the alleged harm to the student, and that he, as an Indian national, is not within the coverage territory.  The insurer argues that, notwithstanding the allegations in the underlying lawsuit, the program's U.S.-based employees did not cause the student's harm.  The insurer argues that the phrase “arises out of” must be narrowly construed to mean “causation,” and that the assaulter – not the school, nor the program or its U.S.-based employees, nor the coordinator – is the only person who actually “caused” the student’s harm.  The court disagrees. It finds that the phrase “arises out of” is a broad term that includes much more than “causation.” The policy could have used the term “causation” instead of “arising out of,” but didn’t. The policy could have defined “arising out of,” but didn’t.

Because the court concludes that the student is a covered person, it does not address the school’s argument that its teachers/employees – who are alleged in the underlying lawsuit to have been negligent – are covered persons.

The umbrella policy:

The court notes that the umbrella policy contains two separate endorsements that exclude coverage for sexual molestation. But one of the endorsements (the 12/05 endorsement) contains an exception, which exception provides that the exclusion does not apply if there is coverage for sexual molestation in the underlying insurance (which, as explained above, the court found there was). The court rejects the insurer’s argument that only the endorsement without the exception (the 01/07 endorsement) should apply because that endorsement has a later date on it. The court finds that the two competing endorsements in the umbrella policy create an ambiguity that is to be construed against the insurer. The court rejects as unreasonable the insurer’s argument that the long string of numbers on the bottom of each page of the policy, including the two exclusionary endorsements, would inform the policyholder (the school) that the endorsement with the exception is overruled by the one without the exception because the latter one was added into the policy later. The court finds that the typical policyholder would not understand that an endorsement containing a string of numbers ending in “07” means that the endorsement is added later – and therefore invalidates – an endorsement containing a string of numbers ending in “05.”

Thus, the insurer must provide coverage for the school, and is in breach of the policy.

Defendant Coordinator:

The court agrees with the insurer that there is a fact dispute over whether the coordinator was an employee of the school, and therefore covered, versus whether she was an independent contractor. Therefore, the court denies summary judgment to the school on this issue.

The School’s Bad Faith Claim:

The court denies the insurer’s request that the school’s bad faith claim be stricken.  The court finds that the insurer’s behavior in this case could amount to bad faith. The court will allow the school to have discovery on this issue.

The School’s Defense Costs To Date:

The court agrees that, because the school was entitled to coverage all along, the insurer is liable to the school (but not to the coordinator – at least yet) for reasonable defense costs incurred to date.

Choice of Defense Counsel:

The court finds that although the insurer must provide a defense, it can do so with independent counsel of its own choosing, not the school’s existing, or preferred, defense counsel.  It relies on a 2011 Vermont superior court decision, Northern Ins. Co. v. Pratt, from another judge (now a Vermont federal judge) for this decision.  The Vermont Supreme Court has not yet addressed the issue of whether an insured can choose its own defense counsel, at the insurer’s expense, where there is a coverage conflict between the insured and the insurer.

Note that the court’s analysis under the CGL policy is different from the main argument that the school made. The school pointed out that the underlying complaint alleges that the school’s teachers/employees were negligent in hiring and supervising the Indian national who allegedly assaulted the student. The school argued that these persons were covered under the “coverage territory” definition in the policy because they were based in the U.S. Instead, the court found coverage based on the activities of the (allegedly assaulted) student in India. The school did cite to the court one case (Spears v. Nationwide) that construed this same “coverage territory” language in a situation where the insured’s employee was in the Ukraine and was the victim of an automobile accident there. In that case, the court found that the employee – the accident victim herself – was covered because the accident arose out of her activities. In this case the court did not cite Spears as support for its conclusion.  

Disclosure: the author of this article represents the insurance broker in this case.


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Nursing Home Staff Falsification of Records

Posted on February 18, 2015 03:32 by Alan R. Jampol

A frequent legal issue faced by nursing facilities is whether it had sufficient staff on hand to care for patients, and whether staff provided care as required by law. As a result, careful record keeping of patient care is necessary, and required, to ensure not only that care given is recorded, but to protect the facility from claims of negligence. Most nursing facilities require staff to not only take careful notes as treatment occurs, but to create weekly summaries of patients’ conditions and events. However, a problem arises when nursing staff are too busy to comply with this requirement. At times, the charting fails to occur at all, or worse, nursing staff create false records.

Often times the duty of creating a weekly summary is assigned to the night shift nurses. Unfortunately, sometimes staff is too busy with patient care to complete their paperwork, which may result in a failure to draft a weekly summary. This results in a patient’s chart containing only entries for care, rather than a summary of the week’s events. The significance of this failure is that it evidences the nurse’s failure to meaningfully review and summarize the patient’s chart. Such a weekly review requires the nurse to take note of the overall care plan of a patient, and any issues or signs that might point to a need to amend the patient’s care plan.

Worse still is the case where a reviewing nurse fails to review and create a weekly summary, and creates a false summary without a legitimate review of the chart. This can result in improper treatment of a patient, as well as a failure in staff to recognize significant issues or stay abreast of recent changes. The weekly summary is an important tool to care givers, and in fact, those providing care of aware of its importance and necessity to providing appropriate care. And such, a failure to maintain a weekly summary or falsification of the summary can evidence of conscious disregard of patient’s needs and of the facility’s duties.

A larger problem occurs when nursing staff not only fail to maintain the weekly summary, but fail to make any treatment notes as required each time a patient is checked on and/or treated. Falsification in this regard can easily be proven, where nursing staff recorded as having provided treatment can be demonstrated through time cards to not have been on duty. Falsification can occur by staff, realizing their failures, and attempting to cover up for themselves. However, more and more frequently such falsification is being committed by administrators who fear costly lawsuits.

While California has a zero-tolerance stance on falsification of records, and such falsification of a medical record is a misdemeanor in California, staff is rarely charged because falsification can be difficult to prove and time consuming to identify. Nonetheless, nursing facilities need to take great care in ensuring its staff is properly maintaining patients’ records to protect against claims of negligence.

In taking a stance against falsification of records, facilities should be aware of the more frequent instances in which it occurs: 1) by overworked or short staffed employees lacking sufficient time to complete paperwork; and 2) to cover up bad outcomes and limit liability. The most important thing a nursing facility can do to help prevent these circumstances is ensure it has sufficient staff on hand to provide proper care to all its patients. Facilities should also hold training sessions to educate staff members regarding record keeping requirements and techniques, as well as falsification of records. Not only should staff be aware that falsification will not be tolerated and of its criminal consequences, but they should also be trained regarding how to recognize falsification by other staff members.

This blog was first posted on Jampol Zimet LLP Insurance Defense Blog. Click here to read the original entry. 

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The Insurance Broker and Dual Agency

Posted on January 12, 2015 08:58 by Marc Zimet

 Insurance brokers and agents know that their respective roles entail unique responsibilities and duties to their clients. Correctly defining an individual as a broker or agent is essential to determining the proper scope of representation and duties owed to the client. This can be difficult where lines are blurred and legally, the determination will depend upon the facts, not how the parties label themselves. Furthermore, it is possible under certain circumstances for an individual to act as both agent and broker. In these cases care must be taken to ensure the broker is meeting its standard of care and ethical considerations are adhered to.

Generally speaking, agency relationships, such as those found in the agent and broker context, arise via contract. While an agency relationship may be oral, in the case of an insurance broker and agent, it should always be in writing to ensure a clear understanding between the parties is documented, as well as to comply with Business and Professions Code.

Typically, brokers are agents of the insurer when it comes to issuing policies, certificates of insurance, collecting premiums, etc. The role of the broker as an agent is generally provided for in the contract between the insurer and broker, as well as the specific circumstances under which the broker has the authority to act as agent.

However, problems may arise where the role of the intermediary is not so clear. For example, where the broker is an agent of the insured, if the insured directs the broker to obtain insurance from a specific insurance company, the broker is also considered to be an agent of the insurer. In situations such as these, the broker may become an agent of the insured for purposes of obtaining coverage, as well as an agent of the insurer for other purposes. Generally speaking, agents are fiduciaries of their principals, owing to their principal the duty of undivided loyalty. One would therefore assume that the dual agency would put the broker in a precarious situation, which is generally not permissible in the realm of agency law. However, in the insurance arena, this dual agency is not always a conflict for the broker.

In California, it has been held that the broker’s duties to the insured do not rise to the level of a fiduciary. A broker need only act with reasonable care. (Workmen’s Auto Insurance Company v. Guy Carpenter & Company, Inc.(2011) 194 Cal.App.4th 1468.) Therefore, in California at least, the broker acting as dual agent will not run afoul of principal-agency law. While the courts have declined to impose the fiduciary duty on brokers, the fact of the matter is that under normal circumstances a dual agency in the context of insurance will rarely see a conflict of interest such as that that the prohibition is intended to prevent. This is because the broker’s responsibilities to the insurer and insured are independent of each other. For example, the broker can easily procure insurance for the insured and collect the premium for the insurer without conflict. Once the broker has obtained coverage as requested by the insurer, the agency relationship between the broker and insured terminates, thereby permitting the broker to continue to collect premiums and issue certificates on behalf of the insurer without any potential for conflict.

While brokers may act in a dual agency capacity, care must still be taken to act with reasonable care and prudence, and a broker may still be liable to insureds for failing to meet this standard. 

This blog was originally posted on January 6. Click here to read the original entry. 


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Corporate policyholders/insureds who have been sued share a common interest with their liability insurers—successfully defending those lawsuits.  Yet insureds and insurers often disagree on the choice of defense counsel and how much the insurer must pay toward legal bills.  These disputes are costly and, in most instances, can be avoided.

Many primary commercial liability policies purchased by corporate policyholders not only impose a “duty to defend,” but also afford insurers the “right to defend.” This express “right” allows the insurer, rather than the insured, to select defense counsel.  Upon seeking a defense under that policy, the insured has relinquished its right to select defense counsel.  

There are two schools of thought regarding whether the assigned defense counsel owes duties only to one client (insured) or to two clients (insured and insurer). Many courts have adopted the two-client or “tripartite relationship” theory, under which insurer-selected counsel (commonly “insurance defense counsel”) has an attorney-client relationship with both insured and insurer.  Where the insurer has agreed to provide a defense to the insured under a reservation of rights, and that reservation raises a conflict of interest such that defense counsel in theory could face divided loyalties, courts have held that the insured is entitled to a defense through counsel of its choice (“independent counsel”).  Most courts hold that not every reservation of rights creates a conflict of interest.  Rather, a conflict of interest has been found where coverage turns on facts or issues to be determined in the underlying action such that the insurer-assigned defense attorney would face a conflict in deciding how to conduct the defense given the duty of loyalty owed to both clients.  

Other courts follow the one-client theory, under which insurance defense counsel represents only the policyholder, not the insurer.  Therefore, the attorney owes no duties to the insurer. Accordingly, in the states following the one-client rule, a reservation of rights cannot give rise to the insured’s right to select its own counsel.

Policyholders often take the position they can select their own counsel, who normally charge higher hourly rates than insurance defense counsel.  The typical arguments include:  (1) the two-client/tripartite relationship model applies, and the insurer’s reservation of rights creates a conflict allowing the insured to select counsel; (2) the insurer’s litigation management guidelines constrain insurance defense counsel from exercising independent professional judgment in the insured’s best interests; and (3) the litigation is particularly important to the insured.  Even when the insurer might acquiesce in the insured’s choice of counsel, disputes arise as to the difference between the insured-selected firm’s proposed rates and the rates the insurer typically pays for that type of case.  Some states have addressed this issue by statute (e.g., California Civil Code Section 2860, limiting hourly rates to those the insurer ordinarily pays) or by case law.  Often, the dispute is left to negotiation and either a compromise (typically by which fees are shared between insurer and insured) or an agreement to disagree, coupled with litigation or arbitration.

There are several solutions to this recurring problem that can eliminate or substantially minimize disputes.  First, the issue can be addressed at the policy negotiation stage.  An insured may insist on controlling the right to select counsel, which often is achieved through a policy endorsement allowing the insured to select counsel or even identifying specific lawyers who will defend lawsuits.  An insurer may protect against a dispute over its future defense cost exposure by including policy language specifying the maximum rates it will pay to defend lawsuits or that it will pay no more than the hourly rates it ordinarily pays in the jurisdiction where a case pends.

Second, insureds should better appreciate that leading property and casualty insurers afford their insureds a full, high quality, and professionally independent defense (regardless of whether of a reservation of rights is asserted).  This is expected of all counsel engaged by insurers.  Significantly, the Defense Research Institute (DRI) Recommended Guidelines for Insurers and Law Firms, which are followed in whole or in substantial part by many insurers, provide: “Nothing contained herein is intended to nor shall restrict Counsel’s independent exercise of professional judgment in rendering legal services for the Insured or otherwise interfere with any ethical directive governing the conduct of counsel.”  Elsewhere the guidelines provide that “in the event of disagreement [over litigation strategy], the final decision will remain the independent professional judgment of defense counsel.”  Whether expressed in an insurer’s guidelines, an engagement letter, or as a matter of practice and expectation, all carriers expect assigned counsel to uphold the ethical obligations they owe their client, the insured.  Further, an insurer may consider emphasizing this reality by agreeing it has no attorney-client relationship with assigned counsel.  See  Michael M. Marick and Karen M. Dixon, “The Insurer’s Contract ‘Right’ To Defend–The ‘Tripartite’ Relationship Reconsidered,” 39 Tort Trial & Ins. Prac. L. J. 1119 (2004) (absence of an agreement in fact to an attorney-client relationship obviates the two-client model, and thus an insured’s ability to select counsel in reservation of rights situations).

Third, insureds and insurers should have an open-minded and transparent discussion on counsel selection immediately after a lawsuit has been filed.  Insurers may consider offering the insured several qualified firms from which to choose.  A “beauty contest” among potential law firms is often highly instructive.  Insurance defense firms often are selected by insureds, even in high exposure cases, both because of their capabilities and they will be paid fully by the insurer.  

Fourth, at the same time counsel is selected, insured and insurer should agree upon litigation management guidelines (including anticipated staffing and budgeting).  It is in the interest of all parties—insured, insurer, and attorneys—to reach a meeting of the minds at the outset of a lawsuit, which facilitates a cooperative and focused defense. Insureds approaching the discussion by taking the position that guidelines are not “binding” on their counsel miss the point.  Both by their language and implementation, leading insurers do not apply guidelines to constrain a lawyer’s ability to fully defend the insured.  Ongoing three-way communication throughout the life of a litigated matter will solve most billing and case management issues.

In sum, insureds and insurers can and should find common ground on how to properly defend high exposure lawsuits. There is no legitimate reason for insureds to be skeptical of an insurer’s counsel selection and litigation management protocols. An honest and open-minded dialogue from the beginning of a lawsuit, and throughout the litigation, should resolve most issues.  

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The V-8 Moment with Regard to Insurance

Posted on August 5, 2014 04:36 by Steve Crislip

Wow, I should have had professional liability coverage.  I remain amazed at how many lawyers forego such coverage. I do not understand that rationale since they would never risk their assets with an uninsured car or house.  Yet, they think this cost of doing business is too high or it somehow is not needed.

Even a totally bogus claim costs real money to defend.  It takes time and work to get these dismissed, with no return of the costs. Lawyers always seem surprised at the legal costs for such work when they send out similar bills each day.  Then if there is a meritorious claim or even a colorable claim, coverage is very much needed.

When I last looked only one state required legal malpractice coverage as a condition of licensing.  Many states annually require you to disclose whether or not you have such coverage for consumer knowledge. I wonder how many clients ever really check that, or if they even care.  If you err in their case, they will sue you regardless. Do not think they will not, just because you have no insurance.  You certainly do not want to explain to family members that they now need to take the bus, since your cars were attached to pay a malpractice judgment.  Just treat this like a business expense and get coverage, and get the right coverage.

You should shop for coverage with brokers and agents as well as Bar groups.  Be totally forthcoming in any applications so there is no reason for any carrier to later deny coverage. Price varies with the amount of risk you are willing to take by way of the deductible.  Sometimes that is just cost pricing with lower annual premiums for higher retention levels by you. Sometimes in order to get big policy limits for some specialty work, you are required to have a big deductible.  Bigger firms are used to that, but smaller firms must always be mindful of the amount of risk they can absorb and how much they can promptly pay for a defense.  Usually the deductibles are for both losses and for the defense of the claim.

At one time, professional liability policies were like your auto policy — occurrence based.  Were you insured when you had the wreck or act of malpractice, or not?  By the 1970’s, that type of coverage disappeared and all are usually claims-made, eliminating the open-ended coverage concerns.  So, now a lawyer needs to be covered when a claim is made and must therefore avoid any gaps in coverage.

Since claims can arise well after the act or occurrence, prior acts coverage was needed to cover such matters forward when changing carriers or policies.  A tail (extended reporting endorsement) or an endorsement for prior acts must be considered carefully when charging firms.  Someone either closing a firm or making a lateral move needs to consider this carefully.  See, “A Primer on Prior Acts Coverage,” Mark Bassingthwrighte, ALPS 411, May 27, 2014.

For example, working in a mid-size regional firm, it made no sense to take in a lateral lawyer and provide them with prior acts coverage under the firm’s policy.  There had been no quality control by the firm and there were totally unknown risks involved with the lateral’s prior work.  With a large deductible, it was just bad business to assume that liability.  Accordingly, all laterals were told to look to their prior carriers or firms for coverage up to the day that they just started at our new firm.  Going forward they were covered, even when they left, as long as our firm was viable and still covered.  A tail may be needed by them from their prior work, but if they were likewise leaving a viable ongoing firm with good coverage, maybe nothing was needed.

Complicated to some degree, but it is just a part of doing business as a lawyer.  You need certain things to practice and this certainly is one of them.  Just like paying the rent on the office, paying for the coverage in a timely manner, and getting the right coverage is kind of important.  Don’t be the person who thinks they will not be sued by their clients. 

Be advised that most are loss and claim deductibles for any expended fees and costs, as well as claims payouts.  Also, it is customary for you to have to pay your full deductible before any carrier pays anything.  So pick a deductible you can afford and then escrow the funds for it as soon as a claim surfaces.  By the way, give notice of claims promptly, again to avoid coverage issues.  See ALPS 411, Claims-Made Reporting Requirement, February 15, 2012.

This blog was originally posted on the Lawyering for Lawyers blog on August 5. Click here to read the original entry. 

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A New York trial judge’s recent decision in Zurich American Insurance v. Sony Corporation of America has set the legal blogosphere aflutter with arguments and counter-arguments as to whether cyber liability and data breach claims fall within the “Personal and Advertising Injury Liability” coverage section (Coverage B) afforded by most commercial general liability (CGL) policies. A new set of data breach exclusionary endorsements, however, filed in many jurisdictions by Insurance Services Office, Inc. (ISO) and set to take effect this month, May 2014, appear poised to end the debate over CGL coverage for these types of claims. But will they?

The issue in Sony was whether the underlying consumer class action claims brought in connection with the 2011 data breach of Sony’s Playstation network sought damages because of “personal and advertising injury” under Coverage B. Zurich’s CGL policy in that case featured the typical definition of “personal and advertising injury”, which included “injury… arising out of… [o]ral or written publication, in any manner, of material that violates a person’s right of privacy.” The New York trial judge held that this definition requires “some kind of act or conduct by the policyholder in order for coverage to be present”. Because “there was no act or conduct perpetuated by Sony”, but rather third party “hackers breaking into that security system”, the court held that Zurich’s CGL policy did not afford coverage for the claims against Sony. 

Courts in other jurisdictions have arrived at the opposite conclusion regarding coverage for cyber liability and data breach claims under Coverage B. See e.g. Netscape Communications Corp. v. Federal Ins. Co., 343 Fed.Appx. 271 (9th Cir. 2009); Tamm v. Hartford Fire Ins. Co., 16 Mass.L.Rptr. 535, 2003 WL 21960374 (Mass. Super. Ct. 2003).

As a result, ISO initially responded by including in its April 2013 revisions to its CGL forms an optional endorsement labeled “Amendment Of Personal And Advertising Injury Definition” (CG 24 13 04 13). This endorsement removes “injury… arising out of… [o]ral or written publication, in any manner, of material that violates a person’s right of privacy” from the definition of “personal and advertising injury” all together. This removal effectively defeats coverage in most cases for cyber liability and data breach claims under Coverage B. The problem is that eliminating this language from the “personal and advertising injury” definition also defeats coverage for the more traditional type of privacy claims typically covered by a CGL policy.

In contrast, ISO’s new exclusionary endorsements set to take effect in May 2014 are more narrowly tailored to the cyber liability or data breach context. For example, one of the new mandatory endorsements labeled “Exclusion-- Access or Disclosure of Confidential or Personal Information and Data-Related Liability-- With Limited Bodily Injury Exception” (CG 21 06 05 14) applies specifically to Coverage B:

This insurance does not apply to:

Access Or Disclosure Of Confidential Or Personal Information

“Personal and advertising injury” arising out of any access to or disclosure of any person's or organization's confidential or personal information, including patents, trade secrets, processing methods, customer lists, financial information, credit card information, health information or any other type of nonpublic information.

This exclusion applies even if damages are claimed for notification costs, credit monitoring expenses, forensic expenses, public relations expenses or any other loss, cost or expense incurred by you or others arising out of any access to or disclosure of any person's or organization's confidential or personal information.

This endorsement features a similar exclusion for coverage provided by the “Bodily Injury And Property Damage” section of the standard CGL form (Coverage A). By removing coverage for claims “arising out of any access to or disclosure of any person's or organization's confidential or personal information”, the new endorsement certainly seems to target coverage for cyber liability and data breach claims. 

Policyholders likely will argue that ISO’s inclusion of these new exclusionary endorsements demonstrate that the standard CGL form, without these exclusions, necessarily provide coverage for cyber liability and data breach claims. Otherwise, the argument will go, there is no need for these new exclusions. That type of argument has had mixed success in other contexts. For example, insureds have argued that the presence of the “your work” exclusion in CGL policies serves as a concession that defective construction work claims necessarily meet the “occurrence” and “property damage” requirements of Coverage A. Insurers that issue or have issued policies without these new “Access or Disclosure of Confidential or Personal Information and Data-Related Liability” endorsements may face this argument. 

Insurers that do issue policies with these new exclusionary endorsements will have to show that they apply to cyber liability and data breach claims. Although the exclusionary provisions are new, carriers can expect policyholders to raise familiar arguments to try to defeat them. 

For example, many liability policies contain exclusions for bodily injury claims arising out of sexual acts, conduct or abuse. Those exclusions certainly eliminate coverage for the direct perpetrator of the act or abuse. Some jurisdictions, however, have held that those exclusions may not apply to claims against indirect tortfeasors, such as employers or parents of the direct perpetrator, under various negligent hiring, retention or supervision theories. The policyholder argument for coverage lies in the theory that the plaintiff’s claim against the employer or parent was one for injury caused not by sexual abuse or conduct, but by negligent hiring, retention or supervision. Whether courts will apply that same reasoning to these new data breach exclusions, and whether it even makes sense to do so, remains to be seen.

ISO’s new exclusionary endorsements appear designed to end the debate over whether CGL policies cover cyber liability and data breach claims. Whether those endorsements have ended the debate, or simply sent it in a new direction, will be decided by the courts in the upcoming years.

Michael L. Young is a partner in the St. Louis, Missouri, office of HeplerBroom LLC. His practice focuses on insurance coverage and civil appellate matters. This post does not necessarily represent the views of HeplerBroom or its clients and is not intended to serve as legal advice or to establish an attorney-client relationship. 


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California Court of Appeals for the Fourth District Rules Insurance Broker Had No Duty To Investigate Insured’s Coverage Needs

On October 4, 2013, the California Court of Appeals for the Fourth District reaffirmed prior rulings regarding the duties of an insurance broker in procuring coverage in San Diego Assemblers, Inc. v. Work Comp for Less Insurance Services, Inc. Assemblers, a remodeling contractor, contacted its broker, Work Comp for Less, to procure a liability policy. It requested only the lowest priced policy available and desired limits, but did not request any specific coverage. Work Comp responded with several plans and Assemblers chose one, without asking any questions concerning the coverage. Assemblers never at any time indicated that it did not want a policy with a manifestation endorsement, or with a prior work completed exclusion. In 2004, Assemblers performed work on a restaurant; in 2008 an explosion and fire caused substantial property damage. The restaurant’s insurer, Golden Eagle Insurance, pursued Assemblers for the damage. Assemblers tendered the claim to its insurer in 2004, Lincoln General Insurance Company, and its insurer in 2008, Preferred Contractors Insurance Company.

Thereafter, Lincoln General denied Assembler’s claim asserting a manifestation endorsement limiting coverage to injury or damage first manifested during the policy period. Preferred Contractors denied coverage asserting the period completed work exclusion. Assemblers informed Golden Eagle that it did not have coverage and stated that it could sue Assemblers. Assemblers thereafter filed bankruptcy and any and all claims in relation to the matter were assigned to Golden Eagle.

Golden Eagle responded by filing suit in Assembler’s name, naming Work Comp as defendant and alleging the broker negligently failed to procure insurance for Assemblers that would cover the fire. Work Comp responded by filing a motion for summary judgment, asserting it had no duty to provide Assemblers with different or additional coverages, as well as asserting the defenses of the superior equities doctrine and statute of limitations. The trial court granted the motion, stating it had no duty to provide different coverage. The court did not consider the issues of the superior equities doctrine or statute of limitations. The plaintiff appealed.

On review, the California Court of Appeals for the 4th District considered the superior equities doctrine, as well as the broker’s duty to procure a different policy.

On the issue of the superior equities doctrine, the Court noted that, though Golden Eagle brought suit as Assembler’s assignee, the analysis of any claimant in subrogation was the same and such a claimant must first demonstrate a right in equity to be entitled to subrogation. An insurer can show this by establishing a position superior to the party to be charged. This cannot be established where the party to be charged is not the wrongdoer whose act or omission caused the underlying loss. Here, there was no evidence Work Comp caused the restaurant fire, nor that it agreed to indemnify Assemblers. Therefore, pursuant to the superior equities doctrine, Golden Eagle’s claim must fail.

The Court next considered whether Work Comp had a duty to procure prior completed work coverage. The Court stated the law is well-settled that insurance brokers owe a limited duty to their clients only to use reasonable care, diligence, and judgment in procuring insurance. This duty is not breached unless the broker misrepresents the nature, extent, or scope of the coverage being offered, there is a request by the insured for a particular type of coverage, or the broker assumes an additional duty by express agreement or by holding itself out as have a certain level of expertise. Golden Eagle argued that Work Comp had an implied duty to investigate Assembler’s coverage needs and procure an appropriate policy. The Court, however, declined to follow this reasoning citing public policy reasons and stating that to create an implied duty in insurance brokers to investigate coverage needs would result in the overselling of insurance to avoid professional liability.

The trial court’s ruling was affirmed.

This case serves to remind brokers of their duties in procuring insurance coverage, as well as the possibility of creating additional duties. While a broker’s duty may be limited, it is important to recognize that a broker can breach the duty by misrepresenting the coverage offered, or by assuming additional duties either by agreement or holding itself out as an expert in specific fields.

This blog was originally posted on November 19, 2013 by Jampol Zimet LLC. Click here to read the original entry. 

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On June 18, 2013, the West Virginia Supreme Court of Appeals issued its opinion in Cherrington v. Erie Insurance Property and Casualty Co., 745 S.E.2d 508 (W. Va. June 18, 2013).  The opinion expressly reversed previous West Virginia jurisprudence through the Court’s holding that defective workmanship causing bodily injury or property damage is an “occurrence” under a commercial general liability (CGL) insurance policy.  


The case originated in 2004 when the underlying plaintiff entered into a “cost plus” contract with a general contractor (“contractor”) for the construction of a home, which included landscaping and interior furnishing.  Several subcontractors were also involved in construction, and their work formed the basis of plaintiff’s damages.  During the construction process, disputes arose between plaintiff and the contractor concerning whether landscaping was included within the contract between the parties.  Plaintiff also felt that she was overcharged for the interior furnishings for the house.  Most importantly, plaintiff alleged that she observed defects in the house following its completion, including an uneven concrete floor, water infiltration, a sagging support beam and cracks in drywall.  

Plaintiff brought suit against the contractor and subcontractors in 2006.  Plaintiff’s complaint and amended complaint alleged that the contractor was negligent through the construction of her home through the following: (1) altering the design; (2) negligently pouring and finishing the concrete floor; (3) finishing and painting the house; (4) placing and securing the foundation.  Plaintiff also alleged that the contractor breached a fiduciary duty through its failure to secure materials and furnishings for the project within the completed contract price.  Plaintiff alleged damages through the contractor’s misrepresentations and negligent acts, which resulted in a reduction in her home’s fair market value.  Plaintiff also alleged emotional distress as a result of the issues with her home.  

Following the filing of plaintiff’s lawsuit, the contractor requested its carrier to provide coverage and a defense through a CGL policy. The carrier denied coverage and a duty to defend.  The contractor subsequently filed a third-party complaint against the carrier seeking a declaration of its rights under the CGL policy. The carrier subsequently filed a motion for summary judgment, contending that the subject policy did not provide coverage for the claims asserted by plaintiff and that a defense was not owed to the contractor.  The trial court granted the carrier’s motion for summary judgment, finding that contractor’s CGL policy did provide coverage for “bodily injury” or “property damage” but plaintiff’s claims of emotional distress without physical manifestation did not constitute a “bodily injury” under the policy’s definition of that term.  The trial court also found that plaintiff failed to establish covered property damage due to the fact that the damages she alleged in her complaint were for economic losses for diminution in value or home or excess charges she was required to pay.  

Importantly, the trial court further found that plaintiff had not established that an “occurrence” or “accident” had caused damages she had sustained because faulty workmanship, standing alone, is not sufficient to give rise to an “occurrence.”  See, Cherrington, at 514.  This finding was premised on the previous holding of West Virginia Court of Appeals in Corder v. William W. Smith Excavating Co., 210 W. Va. 110, 556 S.E.2d 77 (2001); See also, State v. Bancorp, Inc. v. United States Fid. & Guar. Ins. Co., 199 W. Va. 99, 483 S.E.2d 228 (1997). The trial court held that even if plaintiff had sustained covered losses, there was not an “occurrence” pursuant to the contractor’s CGL policy, which would trigger coverage.  Finally, the trial court found that even if it was assumed that coverage existed under CGL policy, coverage would be barred pursuant to the policy’s exclusions.  Citing North American Precast, Inc. v. General Cas. Co. of Wisconsin, 413 Fed. Appx. 574 (4th Cir. 2011) (per curiam) and Groves v. Doe, 333 F.Supp.2d 568 (N.D. W. Va. 2004), the trial court also found that exclusion “M” (“Damage to Impaired Property or Property Not Physically Injured”) would bar coverage because it applies “irrespective of the existence of subcontractors.”  Cherringer, supra., at 515. 

On appeal, the West Virginia Supreme Court of Appeals considered the following assignments of error by the trial court: (1) there was no property damage caused by an “occurrence” under the contractor’s CGL policy; and (2) the CGL policy’s exclusions for “your work” and “impaired property or property not physically injured” precluded coverage.  On appeal, petitioners also advanced the argument that the trial court had refused to interpret the policies consistent with the reasonable expectations of the insured.  


The Court’s analysis started by recognizing that it had previously addressed the issue presented on appeal: is defective workmanship a covered “occurrence” under the provisions of a CGL policy of insurance?  Citing Syl. Pt. 2, Erie Insurance Property and Casualty Co. v. Pioneer Home Improvement, Inc., 206 W. Va. 506, 526 S.E.2d 28 (1999), the Court recited its previous holding: 

A lawsuit commenced by a building owner against a building contractor alleging damages caused by faulty workmanship is not within the coverage provided by the contractor's general liability policy of insurance unless such coverage is specifically included in the insurance policy. A commercial general liability policy insurer has no duty to defend a contractor in a lawsuit nor to indemnify a contractor for sums paid to settle the lawsuit or to satisfy a judgment unless the insurance policy specifically requires the insurer to do so.

In its decision of Corder, supra., the Court further found: 

Commercial general liability policies are not designed to cover poor workmanship. Poor workmanship, standing alone, does not constitute an "occurrence" under the standard policy definition of this term as an "accident including continuous or repeated exposure to substantially the same general harmful conditions."

Id., at Syl. Pt. 2.   The final decision by the West Virginia Supreme Court of Appeals within its trilogy of cases addressing coverage for defective workmanship claims was Webster County Solid Waste Authority v. Brackenrich and Associates, Inc. 217 W. Va. 304, 617 S.E.2d 851 (2005). 

The Court then noted that it was “acutely” aware that after rendering the above referenced decisions, many courts considered the same issues.  The Court noted that a majority of other states reached the contrary conclusion through legislative action or judicial decision.  Cherringer, at 517.  Recognizing a “definite trend” in the law that had arisen since its decisions in the late 1990’s and early-to-mid-2000’s, the Court cited to a multitude of decisions from other jurisdictions.  Ultimately, after citing to the holdings throughout the United States that have addressed this issue, the Court held that a defective workmanship claim constitutes an “occurrence” under a CGL policy of insurance.  Id., at 520.  

The Court formally held that “[i]n order for a claim to be covered by the subject CGL policy, it must evidence bodily injury or property damage that has been caused by an ‘occurrence.’”  Id. Citing the definition of “occurrence” to mean “an accident” the Court noted that the policy did not provide a definition for “accident.”  Through a previous holding, the Court defined accident to exclude damages or injuries that were “deliberate, intentional, expected, desired or foreseen” by the insured.  Id., citing Syl. Pt. 1, Casualty Co. v. Westfield Insurance Co., 217 W. Va. 250, 617 S.E.2d 797 (2005). 

Evidence produced in discovery indicated that the damage to plaintiff’s residence was caused by subcontractors of the primary contractor.  The Court found that the policy’s express language provided coverage for the acts of subcontractors, contained within policy’s Exclusion “L”, by excepting it from the “your work” exclusion: 

This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor. 

The Court’s treatment of the exclusions in the policy deserves special attention because it could significantly mitigate the impact of the Court’s finding concerning what constitutes an “occurrence.”  Examining Exclusion “L” (“Property damage” to “your work”), the Court noted that Exclusion “L” excludes coverage for the work of the contractor but does not operate to preclude coverage under the facts of the case for work performed by the subcontractors.  Id., at 524. Consequently, if the contractor was alleged to have completed the defective work, coverage would have likely been excluded irrespective of whether the defective work constituted an occurrence under the policy. 

Under Exclusion “M” (excluding coverage for (1) a shortcoming in “your product” or “your work” and (2) an issue arising from the insured’s or insured’s agent’s failure to perform contractual obligations), the Court again relied on the fact that the subcontractor performed a significant amount of the work which was defective.  The Court found that Exclusion “M” would act to preclude coverage for the contractor based on the damages caused by the subcontractors.  However, the Court further found that Exclusions “L” and “M” were in conflict and applying Exclusion “M” to preclude coverage for the subcontractor’s work would negate the coverage afforded for subcontractor work in Exclusion “L.”  Id., at 525-526.  The Court found that it was not reasonable to construe two policy exclusions according to their plain language when the operative effect of this exercise results in such an incongruous result.  Id., citing Syl. Pt. 2, D’Annunzio v. Security –Connecticut Life Ins. Co., 186 W. Va. 39, 410 S.E.2d 275 (1991).   The Court disregarded the exclusion contained in Exclusion “M”.  The Court briefly noted that the exclusion for “breach of contract” related actions in Exclusion “M” was also not applicable.   Finally, the Court briefly analyzed the trial court’s conclusory finding that Exclusion N (recall of products) also operated to exclude coverage.  The Court found no support for this finding by the trial court.  

The Court’s opinion also addressed the trial court’s grant of summary judgment in favor of the same carrier in a claim for coverage and defense by a subcontractor/agent (subcontractor) of the contractor pursuant to the subcontractor’s homeowners and umbrella policies of insurance.  Cherrington, supra, at 528. The Supreme Court of Appeals upheld the award of summary judgment in favor the carrier in this instance.  However, the Court did find, consistent with its handling of the CGL policy that the claims against the subcontractor were “occurrences” under the homeowner’s and umbrella policies.  The Court based its affirmation of the denial of coverage based on the business pursuit’s exclusion to the policies.

The effects of the Cherrington decision will likely continue to be felt for the foreseeable future in relation to the interpretation of CGL policies in West Virginia and in other jurisdictions.  Several critical issues will likely need to be addressed in future cases, including the issue of how the West Virginia Supreme Court of Appeals handles the situation when the allegations of defective workmanship are only directed towards work completed by the general contractor.  

Members of DRI’s Insurance Law Committee recognize that they must always be aware of new changes involving insurance coverage.  The recent West Virginia Supreme Court of Appeals decision discussed above demonstrates the importance of membership with DRI and the value that DRI’s seminars provide.  For more information about how the Cherrington decision could affect future coverage decisions in other jurisdictions, please consider attending the DRI’s Insurance Coverage and Practice Symposium on December 12th and 13th, 2013 in New York City.  The program will offer an outstanding opportunity for practitioners to learn about the latest decisions in coverage litigation and how they will shape insurance practice for the foreseeable future.  The Insurance Coverage and Practice Symposium will also present an outstanding opportunity to network with colleagues.  

For more information, please click here. See you in New York!

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In United Ins. Co. of Am. v. Boron in the Circuit Court of Cook County, Illinois, three life insurers have filed an action seeking declaratory and injunctive relief from the Illinois Department of Insurance Regulations that impose an obligation on life insurers to utilize the Social Security Death Master File to ascertain whether its insureds are deceased and benefits owed to their beneficiaries under policies issued in the State of Illinois.

The insurers claim that under the Insurance Code an insurer is required to settle and pay claims only after receipt of due proof of death and upon receipt of a claim by the insured’s estate or beneficiary. The policies issued by the insurers also contain language consistent with the Insurance Code in this respect. Therefore, the insurers argue that the new obligations put in place by the Regulations are unfounded in law and contradict the Insurance Code and the express terms of the policies.

The insurers argue that if no death claim is filed, the insurers have no affirmative obligation to search for proof of death or to take steps to pay benefits under the terms of the policies until the insured has reached the “mortality limiting age.” According to the NAIC approved mortality table incorporated into the insurer’s policy forms, that age is 99. Currently, if no claim is filed, benefits under the policy will be paid when the insured reaches the age of 99.

The state of Illinois has taken the lead in the mufti-state market conduct examination in this area joined by five other states (California, Florida, Pennsylvania, New Hampshire, and North Dakota). Recently, these investigations have resulted in multi-million dollar settlements for life insurers who have been found to affirmatively use the Death Master File for their benefit in terminating annuity payments, but also did not utilize the Death Master File to search for deceased policyholders whose beneficiaries were owed life insurance proceeds. The insurer’s in this action claim that they do not use the Death Master File for any purpose.

This blog was posted on September 11 on Goldberg Segalla LLP’s Insurance and Reinsurance Report Blog. Click here to view the original post. 
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CA Court of Appeals Rules Insured Must Accept Insurer’s Counsel Where No Conflict of Interest Exists That Could Be Influenced by Retained Counsel

On August 26th, the California Court of Appeals ruled in Federal Insurance Company v. MBL, Inc. (2013) — Cal.App.3d– that an insured must accept its insurer’s defense counsel where no conflict of interest exists that could be influenced by defense counsel in litigation. The issue arose when MBL, a supplier of dry cleaning products, was sued by one of its customers seeking indemnity and contribution after the customer was found responsible by the federal government for contamination of land on which its dry cleaning business operated.

MBL tendered the defense to its several insurers, who accepted the tender of defense subject to reservations of rights, and retained counsel to represent MBL. However, MBL refused to accept the insurers’ counsel on the grounds that the insurers’ reservations of rights created a conflict of interest. MBL instead demanded the insurers pay for independent counsel of MBL’s choosing. The insurers denied the existence of a conflict of interest and filed action seeking declaratory relief from the trial court that no conflict existed. The trial court granted summary judgment in favor of the insurers and MBL appealed.

On review, the Court of Appeals revisited the issue of when independent, or “Cumis,” counsel must be provided to an insured. In San Diego Federal Credit Union v. Cumis Ins. Society, Inc., the court held that where a conflict exists between an insured and insurer based on potential non-coverage under the insurance policy, the insured is entitled to independent counsel at the insurer’s expense. This rule was later codified by California Civil Code section 2860, which further provides: “[f]or purposes of this section, a conflict of interest does not exist as to allegations or facts in the litigation for which the insurer denies coverage; however, when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim, a conflict of interest may exist. No conflict of interest shall be deemed to exist as to allegations of punitive damages or be deemed to exist solely because an insured is sued for an amount in excess of the insurance policy limits.”

As explained by the Court, it is clear from the language of section 2860 that not every situation in which a conflict exists between an insurer and insured gives rise to the right to Cumis counsel. The reasoning for this is that the basis for Cumis counsel is not in insurance law, but rather in the professional duties of an attorney to avoid conflicts of interest in representation. It has previously been held that where a reservation of rights is based on coverage issues that have nothing to do with the underlying litigation, no conflict exists.

In the instant case, the insurers’ various reservations of rights were based upon acts not occurring within the policy periods, qualified exclusions, as well as a general reservation of rights. The Court first held that a general reservation of rights does not give rise to the right to Cumis counsel. Furthermore, the Court stated that all reservations of rights by the insurers were not issues that could have been influenced by MBL’s retained counsel in litigation. Therefore, because the reservation of rights did not require retained counsel to represent conflicting interests between the insured and insurer, the insurers were not required to provide independent counsel.

It is important for insureds to understand and be aware of the circumstances under which they may have the right to independent counsel. Furthermore, it is equally important for insurers to identify the situations that create a conflict between the insurance company and insurer such that independent counsel should be provided. A comprehensive understanding of both parties on this issue can aid in settling representation issues before litigation on the subject becomes necessary.

This blog was originally posted on September 3. Click here to read the original entry. 

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Categories: Insurance Law

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