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Broker Liability

A $24 Million Yacht Burns: Its Owner Ignores Key Policy Terms and Conditions

An expensive loss and court battle hinge on the boundaries of a broker's obligations to insureds.
By: | June 1, 2018 • 4 min read

Photo: Kurt Roll via YouTube

Whether a broker is in constant contact with an insured or merely checking in before renewals, it can’t change the fact that the onus for understanding and meeting a policy’s terms and conditions rests first and foremost on the insured.

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That’s the painfully expensive lesson learned by millionaire Larry Jodsaas, the owner of the pleasure craft Polar Bear, a yacht that took five years and $24 million to build.

Smoke rose in San Diego Bay on the morning of June 19, 2014, above the Chula Vista shipyard where the Polar Bear was in drydock for repairs. A local ship captain sent up his drone to get a closer look. What he saw was any boat lover’s worst nightmare: The Polar Bear engulfed in flames.

The craft was a total loss.

Of Damages and Fires

The Polar Bear was en route to the shipyard for routine maintenance when it ran aground on the Zuniga Jetty at the entrance of the San Diego Bay.

The impact damaged the bottom of the hull, port and starboard sides of the keel and the aft port stabilizer shaft.

The yacht was covered under a Lloyd’s marine policy placed through Marsh, and the policy remained in effect while the vessel was undergoing routine maintenance in the shipyard.

When it arrived at the shipyard in May after hitting the Zuniga Jetty, the Polar Bear needed major repairs instead of the planned routine maintenance. Neither Jodsaas nor Roger Trafton, the ship’s captain, notified Marsh or Lloyd’s of the situation.

They reasoned the cost of repairs would be below the deductible.

Unfortunately, welding performed during repairs led to the demise of the Polar Bear.

Claims Denied

The broker on the marine policy, Katherine Johnson, provided Lloyd’s with a notice of loss the day after the fire. Lloyd’s, however, denied coverage.

The Polar Bear’s policy contained a repair clause stating that for major repairs or alterations involving hot work (welding), prior agreement must be obtained from the insurer. Failure to notify the insurer of the needed repairs voided the coverage in full.

Lloyd’s sought declaratory relief that it had justifiably denied coverage for the claim. Jodsaas, filing as Bear LLC (“Bear”), filed counterclaims against Lloyd’s and a third-party complaint against Marsh, asserting breach of oral contract, breach of fiduciary duty and negligence.

“As long as the insured, even with more advice from the broker, remains in the driver’s seat, [the special relationship] doctrine does not apply.” — Christopher St. Jeanos, attorney, Willkie Farr & Gallagher

In addition, Bear claimed a “special relationship” with Marsh, establishing a heightened duty to advise. Had Johnson dissuaded Bear from electing the Lloyd’s policy, it argued, it could have recovered the policy limit of $17.3 million.

A local ship captain spotted the plume of smoke and sent his drone in for a closer look at the fire consuming the Polar Bear.

The Court granted Lloyd’s summary judgment, holding that Bear had breached the terms of the repair clause. Marsh’s motion for summary judgment was granted in part and denied in part.

Claims for breach of contract, breach of general fiduciary duty and negligence were denied. But the claim for breach of a heightened duty to advise could proceed to trial. Contacted for this story, Marsh declined comment.

The Court’s Verdict

In the U.S. District Court in the Southern District of California, the court applied the “special relationship” doctrine narrowly. As other courts have in similar disputes, it examined the depth of the relationship between Bear and Marsh and the broker’s role in decision-making, among other elements.

Christopher St. Jeanos, attorney, Willkie Farr & Gallagher

It concluded that the services Marsh provided for Bear were the same as the services being provided for all of Marsh’s clients.

Also, the fact that the broker had not been notified of the jetty incident — and the fact that Johnson and Jodsaas had never met in person during their 10-year acquaintance — contradicted claims of a “deep relationship.”

“The court reconfirmed that [the ‘special relationship’ doctrine] is a narrow exception to the general rule that only applies in exceptional circumstances and found that the facts in this case did not trigger it,” said the lead attorney on the case, Christopher St. Jeanos of Willkie Farr & Gallagher.

A Broker’s Role

The question of who retains decision-making authority is a key factor in this case or any case where a “special relationship” with a broker is in question.

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“As long as the insured, even with more advice from the broker, remains in the driver’s seat,” said St. Jeanos, “this doctrine does not apply.”

The court further noted there was no evidence the loss would have been paid if Johnson had advised Bear to select an alternate carrier. Under a Chubb policy that had been under consideration, conditions applied that would have required the insured to notify it of the jetty strike and subsequent major repairs.

“The entire case turns on Jodsaas’ and Trafton’s failure to provide notice,” said the court, also noting Bear had received notice of the repair clause conditions more than a dozen times.

While the yacht claim was a loss, Bear did settle a claim with the shipyard for $9.2 million. A judgment was also granted against the company performing the welding. However, that company folded after the incident, and its owners are thought to have fled the country. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.

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In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.

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Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”

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How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.

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One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]