July 18.2014

D&O Coverage: The Devil Is In the Details

by Mary McCutcheon

A five-paragraph opinion by the New York Appellate Division suggests the potentially devastating consequences of ignoring the fine print of Directors & Officers Liability insurance policies. In Associated Community Bancorp., Inc., et al. v. St. Paul Mercury Ins. Co., 2014 NY Slip Op 04697 (App. Div., First Dept.), the court held that a bank caught up in the Madoff debacle had no coverage, not even for defense costs, for investor claims.

The court devoted one paragraph to each of the four exclusions which it found eliminated coverage for the investors’ claims. Three of those exclusions are fairly unique to Bankers Professional Liability Insurance Policies and are not found in most D&O policies. However, the Court’s final ground for denying coverage was the policy’s “Personal Profit and Advantage Exclusion” (often called the Profit/Advantage Exclusion).

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Posted in D & O

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July 02.2014

California Supreme Court Refines the Tort of Commercial Disparagement

by Tyler Gerking

On June 12, 2014, the California Supreme Court issued its decision in the closely watched case of Hartford Casualty Insurance v. Swift Distribution, Inc., S207172.  I reported on the Court of Appeals decision last year on this blog in the post "California Supreme Court to Decide Scope of Implied Disparagement; Implications for Coverage in IP and False Advertising Cases" and related article "California To Draw The Lines In Disparagement Liability"

The Court affirmed the Court of Appeals ruling that an insurer did not have a duty to defend its insured against allegations that it had infringed a competitor’s trademark and patents by producing and selling a similar looking music equipment cart with a very similar name (“Multi-Cart” vs. “Ulti-Cart”). Id.  The insured argued that there was a potential for covered damages, and hence a duty to defend, because the underlying complaint alleged facts supporting a claim of implied disparagement, and its general liability policy covered damages because of the publication of material that “disparages a person’s or organization’s goods, products or services.”  The Court found no potential for liability based on disparagement, either express or implied, reasoning that the insured was not alleged to have identified the competitor or its product, or to have “necessarily referred to and derogated” the claimant’s product. 

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Posted in General Liability Policies, Intellectual Property Claims

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June 26.2014

Halliburton Decision May Drive Up Litigation Costs and Impact Settlement

by Amanda Hairston

The U.S. Supreme Court’s recent decision in Halliburton Co. v. Erica P. John Fund, Inc. is not the game changer for securities litigation that some hoped for, but D&O insurers will be keeping a close eye on securities cases to see whether the decision increases defense costs or changes settlement calculations. 

In Halliburton, the Supreme Court refused to overturn its decision in Basic Inc. v. Levinson, which held that plaintiffs in securities class actions do not need to prove that the class members actually relied on the alleged misrepresentations at issue.  The Court did rule, however, that defendants can now challenge the presumption that the alleged fraud affected share prices at the class certification stage.  The ruling does not give defendants a new right as they were free to challenge the “price impact” presumption after class certification through summary judgment or at trial, but it does mean that defendants can mount this challenge earlier.  Doing so would increase up-front litigation costs, resulting in self-insured retentions being eroded more quickly and implicating D&O coverage at an earlier point.  

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Posted in D & O

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June 19.2014

Newly-Published Regional Steel Case Raises More Questions Than It Answers

by Erica Villanueva

In May, California’s Second Appellate District affirmed a summary ruling that a Commercial General Liability insurer did not have a duty to defend a subcontractor who supplied faulty “seismic tie hooks” that were encased in concrete shear walls.  The case is Regional Steel Corporation v. Liberty Surplus Insurance Corporation, Cal. Ct. App. 2d Dist. B245961, and the court has just granted Liberty’s request to certify the case for publication. 

The Second Appellate District declined to follow the “incorporation doctrine,” adopted by the First Appellate District in cases such as Armstrong World Industries, Inc. v. Aetna Casualty & Surety Co., 45 Cal.App.4th 1 (1st Dist. 1996), Shade Foods, Inc. v. Innovative Products Sales & Marketing, Inc., 78 Cal.App.4th 847 (2000).  At issue in Armstrong was the cost of removing asbestos-containing building materials, which had been installed in larger structures.  At issue in Shade Foods was a supply of ground almonds that was contaminated with wood chips, but had been incorporated into “nut clusters” for breakfast cereal.  In both cases, the First Appellate District held that the mere incorporation of these faulty products or material into third-party property constituted covered “property damage.” 

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Posted in Construction Insurance, General Liability Policies

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April 23.2014

Panel Discussions on Mitigating Cyber Risk

by Tyler Gerking

Earlier this month, I gave a presentation with Irfan Saif, principal of Deloitte & Touche, on cyber insurance at the Institute for Advance Corporate Counsel (iACC) in Burlingame, CA.  We discussed how companies can analyze their data-related risks and develop strategies to mitigate those risks, including through the purchase of insurance.  Because cyber insurance is still a developing market, insurance policy forms are far from standardized and often can be negotiated.  As a result, it is important to carefully analyze your company’s data security risks and the proposed policy forms when considering the purchase of cyber insurance.  This is particularly critical when the company’s risks are related its data held by third-parties or computer systems that rely on third-party systems, as the scope of coverage for these risks varies widely among the policy forms currently available.

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March 18.2014

Mitigating Cyber Risk: Strategies to Reduce Exposure

by Tyler Gerking

It’s official—cybersecurity is now a top-ranked risk at the board level, according to the “Lloyds Risk Index 2013.” This should make digital risk a focus of senior corporate management.

Those managing corporate risk should leverage the emerging cyber insurance market, which is rapidly growing and evolving. But they should do so methodically, after gaining an understanding of the company’s security controls and individual risk profile. In the rush to buy cyber insurance, companies may too often fail to appreciate the strengths and weaknesses in their security controls, their risks and exposures, and the coverage they need.

While a variety of potential approaches exist for assessing cybersecurity requirements, this article discusses one method to help you understand your company’s risks and exposures, and how that knowledge can be used to choose the security and risk transfer strategy that most appropriately fits your needs.   Click here to read the full article on the Corporate Counsel website.

By Tyler Gerking, insurance coverage partner in Farella Braun + Martel’s San Francisco office, and Mark Massey, principal in Deloitte Financial Advisory Service’s San Jose office.

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Posted in General Liability Policies, Risk Management

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February 19.2014

Common Policyholder Pitfalls When Navigating London Aviation Insurance Claims

by Erica Villanueva

By Dennis Cusack and Erica Villanueva

Maintaining appropriate insurance is critical for the entire aviation industry.  Many US-based airlines, aircraft owners/financiers, and aircraft lease servicers devote significant resources at the front end setting up their insurance programs, maintaining schedules of insured assets, and making annual trips to London for meetings with the major players in the Lloyd’s aviation market.  But it is equally important that companies plan for the possibility of major claims under their policies.  Companies do not always anticipate some of the unique challenges that US-based insureds face when making a claim under their aviation policies.

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Posted in General Liability Policies

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October 08.2013

The CGL “Business Risk” Exclusions

by David Smith

I recently came upon an interesting case from the United States Court of Appeals for the First Circuit that examined the complex and confusing Commercial General Liability (CGL) “business risk” exclusions. Oxford Aviation, Inc. et al. v. Global Aerospace, Inc., 680 F.3d 85 (1st Cir. 2012) These exclusions were written to restrict coverage for claims relating to the repair or replacement of the insured’s faulty work or products, or defects in the insured’s work or products. They are frequently misread or misunderstood, particularly by claims adjusters who tend to see them as absolute bars to coverage for claims involving any damage to an insured’s work.

An aircraft owner (Airlarr) sued an aircraft repairer, Oxford Aviation, Inc., alleging negligent and faulty performance. Airlarr claimed that Oxford’s work on one of its planes left it with uncomfortable seats, leaking fuel injectors and a cracked turbocharger and a window that cracked when the plane was being flown back to Airlarr’s base from Oxford’s premises.

Oxford’s insurer, Global Aerospace, denied Oxford’s claim for a defense to the lawsuit based on the business risks exclusions. Oxford sued Global Aerospace for declaratory relief. Both parties filed for summary judgment on the duty to defend issue. The trial court granted Global Aerospace’s motion, holding that the claims fell within the exclusions. Oxford appealed.

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Posted in General Liability Policies

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June 14.2013

Recent Media Coverage Overstates Impact of New Second Circuit Case Regarding “Drop-Down” Issue

by Erica Villanueva

Over the past few days, there has been much hand-wringing over the Second Circuit’s decision in Mehdi Ali v. Federal Insurance Co., __ F.2d __ (2d Cir. 2013) in which the court declined to extend the holding of Zeig v. Massachusetts Bonding & Insurance Co. , 23 F.2d 665 (2d Cir. 1928), to the specific facts of the case before it. Commentators are chalking it up as a major victory for insurers, claiming that policyholders have now lost a key precedent, one which had previously allowed them to argue that an excess insurer can be required “drop down” to cover losses below its attachment point.

Not so fast.

As an initial matter, the Zeig case does not stand for the proposition described above. The Zeig case held that an excess insurer could be required to pay losses above its attachment point, if the insured had actually sustained those losses. In Zeig, an insured suffered a property loss which exceeded the limits of his primary policy, but settled with that insurer for less than the full primary policy limits. The Second Circuit reasoned that, because the insured could demonstrate that it had actually suffered property losses in excess of the primary limits, the excess insurer could be required to pay that portion of the loss which exceeded its attachment point.

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Posted in D & O, Property Insurance

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June 11.2013

New case affirms broad duty to defend in construction defect case where damage dates unclear

by John Green

A new case from Oregon deals with a recurring problem in construction defect litigation—the absence of clear dates in the complaint regarding when damage is alleged to have occurred. Frequently, a plaintiff will allege that defects in a construction project have caused property damage to other elements of the project, but the complaint is often silent as to when the damage allegedly began. We have long argued that, since the duty to defend exists if there is any “potential” of covered liability, there is a potential that damage happened before that project was completed, or at any time after completion, triggering all policies in that time frame. This implicates the policies in effect both during the course of operations and after operations are completed. This point is particularly important if some or all of the policies exclude liability falling within the completed operations hazard. This was the situation in Breese Homes, Inc. v. Farmers Insurance Exchange, 353 Or. 112 (2012). There, the court rejected Farmers argument that a claim was excluded by a “products/completed operations hazard” exclusion unless the insured could produce facts showing that damage in fact occurred prior to the completion of the project. The Oregon Supreme Court ruled that the duty to defend was governed by the complaint, which clearly encompassed the possibility that damage occurred prior to completion, and that the insured had no burden to establish any additional facts to support that potential.

While Breese involves a simple and straightforward application of established duty to defend law, the case provides helpful authority in countering the specious positions taken by many carriers on this issue.

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Posted in Construction Insurance, Property Insurance

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