The Law

Legal Spotlight

A look at the latest legal cases impacting the industry.
By: | September 14, 2016 • 4 min read

Unhealthy Air Caused Physical Damage

On four nights in July and August, 2013, the Oregon Shakespeare Festival Association cancelled performances at its open-air theater in Ashland. Nearby wildfires impacted air quality and dusted theater surfaces with soot.

R9-15-16p14_LegalSpotlight.inddThe theater filed a claim with its property insurer, Great American Insurance Co., for loss of business income due to building damage.

The insurance company denied the claim, saying there was no physical damage to the property. Therefore, it said, the policy’s business income provisions were not activated.

On June 7, the U.S. District Court for the District of Oregon disagreed.

It rejected the insurer’s argument that damage was not physical, stating that “while air may often be invisible to the naked eye, surely the fact that air has physical properties cannot reasonably be disputed.”

It also rejected the insurance company’s argument that the claim was excluded because the cancellations were voluntary. The court noted the air quality ratings on those days were “unhealthy,” and that a “period of restoration” was needed for repairs, citing the time spent by theater employees changing air filters and cleaning soot and ash from theater surfaces.

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Exclusions for smog or pollutants were rejected as well. There was no evidence “any fog or haze … could have combined [with smoke] to create ‘smog,’ ” the court ruled, and the pollutant exclusion did not apply because it related to restoration due to “enforcement of or compliance with any ordinance or law.”

Scorecard: The court ordered the lawsuit to be tried before a jury to determine the amount of damages.

Takeaway: Damage does not always have to be structural or physical if it renders a property unusable.

Title Insurer May Be on Hook for $2.05 Million Claim

In 2005 and 2006, Johnson Bank purchased two title insurance policies from First American Title Insurance Co. in the total amount of $2.05 million for two parcels for which it loaned money to the property owners. The property owners defaulted on their loan to the bank when it was discovered the land could not be developed commercially.

In 2010, the bank purchased the land at a trustee’s sale for $102,000, and a year later, filed a claim against First American because the title insurer had not revealed the commercial development restrictions.

At dispute was the date on which the damage claim should be based — with the value being $2.05 million or $102,000.

Johnson Bank argued it should be the day the title insurance was issued. The insurer said the damages should be based on the value of the properties when they were foreclosed, arguing that a loss is not incurred until the date of the foreclosure (at which point the real estate market had significantly declined).

The policy language was ambiguous as to when the date of loss should be calculated.

A lower court in Arizona ruled in favor of the insurance company. An appeals court reversed that, deciding that because First American “failed to discover and timely disclose” the restrictions on commercial development, the policy was breached when the loans were made.

On appeal, the Supreme Court of the State of Arizona upheld the latter decision on June 13, although it returned the case to a lower court for further proceedings.

“The insurer has complete control of the title defects against which it insures; it is in the best position to avoid such risks and prevent resulting loss by conducting thorough and accurate title searches,” the court ruled.

Scorecard: The title insurance company may be required to pay $2.05 million to the bank.

Takeaway: Allowing the title insurer to use the foreclosure date would allow it to profit from its defective title in a depreciated real estate market.

Insurer Fails to Win New Trial

On March 13, 2010, brothers Amaury and Amed Villa cut a hole in the roof of an Eli Lilly and Co. warehouse and storage facility in Enfield. Conn. They deactivated the security system and stole more than 40 pallets of pharmaceuticals, valued at about $60 million.

R9-15-16p14_LegalSpotlight.inddEventually both men pleaded guilty to the theft, and National Union Fire Insurance Co. paid out more than $42 million in claims to Eli Lilly.

As subrogee, National Union later filed a negligence suit against Tyco Integrated Security, formerly known as ADT Security Services. Tyco provided the security for the warehouse. National Union accused it of failing to warn Eli Lilly of the security system’s failures.

It also failed to tell Eli Lilly about additional thefts, according to the lawsuit, which also claimed that a Tyco employee knew the thieves.

Tyco said that its employee was distantly related and had “little or no interaction” with them.

A jury concluded on April 4, 2016 that Tyco was not negligent in its protection of “confidential details of Eli Lilly’s security” or in failing to warn the company of previous thefts. It found Amaury and Amed Villa each liable in the amount of $10 million.

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On June 22, the U.S. District Court for the Southern District of Florida denied the insurance company’s request for a new trial or to amend the verdict.

“On the case presented before the jury, the evidence was sufficient to resolve the matter the way it did in favor of Tyco,” the court ruled.

Scorecard: The imprisoned two brothers were ordered to pay $10 million each to the insurance company, but Tyco will not have to pay any damages.

Takeaway: National Union needed to establish a “manifest injustice” occurred for a new trial to be ordered.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Robotics Risk

Rise of the Cobots

Collaborative robots, known as cobots, are rapidly expanding in the workforce due to their versatility. But they bring with them liability concerns.
By: | May 2, 2017 • 5 min read

When the Stanford Shopping Center in Palo Alto hired mobile collaborative robots to bolster security patrols, the goal was to improve costs and safety.

Once the autonomous robotic guards took up their beats — bedecked with alarms, motion sensors, live video streaming and forensics capabilities — no one imagined what would happen next.

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For some reason,  a cobots’ sensors didn’t pick up the movement of a toddler on the sidewalk who was trying to play with the 5-foot-tall, egg-shaped figure.

The 300-pound robot was programmed to stop for shoppers, but it knocked down the child and then ran over his feet while his parents helplessly watched.

Engaged to help, this cobot instead did harm, yet the use of cobots is growing rapidly.

Cobots are the fastest growing segment of the robotics industry, which is projected to hit $135.4 billion in 2019, according to tech research firm IDC.

“Robots are embedding themselves more and more into our lives every day,” said Morgan Kyte, a senior vice president at Marsh.

“Collaborative robots have taken the robotics industry by storm over the past several years,” said Bob Doyle, director of communications at the Robotic Industries Association (RIA).

When traditional robots joined the U.S. workforce in the 1960s, they were often assigned one specific task and put to work safely away from humans in a fenced area.

Today, they are rapidly being deployed in the automotive, plastics, electronics assembly, machine tooling and health care industries due to their ability to function in tandem with human co-workers.

More than 24,000 robots valued at $1.3 billion were ordered from North American companies last year, according to the RIA.

Cobots Rapidly Gain Popularity

Cobots are cheaper, more versatile and lighter, and often have a faster return on investment compared to traditional robots. Some cobots even employ artificial intelligence (AI) so they can adapt to their environment, learn new tasks and improve on their skills.

Bob Doyle, director of communications, Robotic Industry Association

Their software is simple to program, so companies don’t need a computer programmer, called a robotic integrator, to come on site to tweak duties. Most employees can learn how to program them.

While the introduction of cobots into the workplace can bring great productivity gains, it also introduces risk mitigation challenges.

“Where does the problem lie when accidents happen and which insurance covers it?” asked attorney Garry Mathiason, co-chair of the robotics, AI and automation industry group at the law firm Littler Mendelson PC in San Francisco.

“Cobots are still machines and things can go awry in many ways,” Marsh’s Kyte said.

“The robot can fail. A subcomponent can fail. It can draw the wrong conclusions.”

If something goes amiss, exposure may fall to many different parties:  the manufacturer of the cobot, the software developer and/or the purchaser of the cobot, to name a few.

Is it a product defect? Was it an issue in the base code or in the design? Was something done in the cobot’s training? Was it user error?

“Cobots are still machines and things can go awry in many ways.” — Morgan Kyte, senior vice president, Marsh

Is it a workers’ compensation case or a liability issue?

“If you get injured in the workplace, there’s no debate as to liability,” Mathiason said.

But if the employee attributes the injury to a poorly designed or programmed machine and sues the manufacturer of the equipment, that’s not limited by workers’ comp, he added.

Garry Mathiason, co-chair, robotics, AI and automation industry group, Littler Mendelson PC

In the case of a worker killed by a cobot in Grand Rapids, Mich., in 2015, the worker’s spouse filed suit against five of the companies responsible for manufacturing the machine.

“It’s going to be unique each time,” Kyte said.

“The issue that keeps me awake at night is that people are so impressed with what a cobot can do, and so they ask it to do a task that it wasn’t meant to perform,” Mathiason said.

Privacy is another consideration.

If the cobot records what is happening around it, takes pictures of its environment and the people in it, an employee or customer might claim a privacy violation.

A public sign disclosing the cobot’s ability to record video or take pictures may be a simple solution. And yet, it is often overlooked, Mathiason said.

Growing Pains in the Industry

There are going to be growing pains as the industry blossoms in advance of any legal and regulatory systems, Mathiason said.

He suggests companies take several mitigation steps before introducing cobots to the workplace.

First, conduct a safety audit that specifically covers robotics. Make sure to properly investigate the use of the technology and consider all options. Run a pilot program to test it out.

Most importantly, he said, assign someone in the organization to get up to speed on the technology and then continuously follow it for updates and new uses.

The Robotics Industry Association has been working with the government to set up safety standards. One employee can join a cobot member association to receive the latest information on regulations.

“I think there’s a lot of confusion about this technology and people see so many things that could go wrong,” Mathiason said.

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“But if you handle it properly with the safety audit, the robotics audit, and pay attention to what the standards are, it’s going to be the opposite; there will be fewer problems.

“And you might even see in your experience rating that you are going to [get] a better price to the policy,” he added.

Without forethought, coverage may slip through the cracks. General liability, E&O, business interruption, personal injury, cyber and privacy claims can all be involved.

AIG’s Lexington Insurance introduced an insurance product in 2015 to address the gray areas cobots and robots create. The coverage brings together general and products liability, robotics errors and omissions, and risk management services, all three of which are tailored for the robotics industry. Minimum premium is $25,000.

Insurers are using lessons learned from the creation of cyber liability policies and are applying it to robotics coverage, Kyte said.

“The robotics industry has been very safe for the last 30 years,” RIA’s Doyle said. “It really does have a good track record and we want that to continue.” &

Juliann Walsh is a staff writer at Risk & Insurance. She can be reached at [email protected]