The Law

Legal Spotlight

A look at the latest legal cases impacting the industry.
By: | October 1, 2016 • 4 min read

$1 Million Theft Excluded from Coverage

In July 2012, John Moon, one of the owners of Alphacare Services Inc., which performed payroll services for Construction Contractors (Contractors), told Contractors that AlphaCare did not have enough assets to pay payroll, taxes or benefits expenses for Contractors’ subscribers.

A well-dressed man put money in the jacket

Eventually, auditors informed Contractors that Moon (who was charged in May 2016 by the U.S. Attorney’s Office and is awaiting trial for wire fraud) had wire-transferred about $930,000 from Construction Contractors’ funds to use for personal and AlphaCare expenses, leaving the company with substantial unpaid tax liabilities, according to court documents.

On Jan. 10, 2013, Contractors purchased a crime insurance policy, which included coverage for employee theft, from Federal Insurance Co. It advised the insurer there was still about $1 million that was unaccounted for.

Contractors later discovered the missing $1 million was stolen by check, and it submitted a claim for that amount with the carrier, according to court documents.

Federal Insurance denied the claim, saying all of the losses were a single loss under the policy because the insured had already discovered there was a loss prior to taking on the policy.

After a hearing in the U.S. District Court for the Northern District of Ohio at Toledo, the court agreed.

On July 11, the U.S. 6th Circuit Court of Appeals upheld the decision.

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“Because Construction Contractors discovered the wire fraud prior to the policy’s execution and the check theft and wire fraud constitute a single loss, the check-theft loss is excluded from coverage under the policy,” the court ruled.

Scorecard: The insurance company does not need to pay the $1 million theft claim.

Takeaway: The insured was aware of the loss “even if ‘the exact amount or details … are unknown.’ ”

Ruling Modifies ‘Care, Custody and Control’

In January 2013, Texas Trailer Corp., under the direction of the American Bureau of Shipping (ABS), tested a container designed by EPMP Ltd. and SandCan LLC to store and deliver sand from a mine to a well site.

Applying excess weight to the container deformed the corner castings and subsequent tests deformed the container, eventually causing a crack in the corner casting weld. The crack constituted a failure of the certification test.
EPMP and SandCan sued both Texas Trailer and ABS for damages. Texas Trailer (TTC) sought a defense from National Union Fire Insurance Co., but the insurer said the policy did not cover the damage.

After a jury found that only ABS had been negligent, not Texas Trailer, TTC sued National Union for reimbursement of litigation costs in excess of its $100,000 per occurrence retained limit, and breach of contract. The carrier sought a summary judgment on the trailer company’s claims.

On June 28, the U.S. District Court in the Northern District of Texas ruled in favor of National Union.

At issue was whether an exclusion for damage of property in the “care, custody or control” of the insured excluded coverage of the claim. The insured argued the container was only within its “physical control,” and not its “care, custody or control.”

The insurer “need only show that the property was ‘under the immediate supervision of the insured and [was] a necessary element of the work involved,’ ” the court ruled. “ABS may have designed the tests, but TTC actually performed them.”

Scorecard: National Union was not required to pay Texas Trailer’s litigation costs.

Takeaway: TTC’s argument that it acted under ABS’ guidelines was not sufficient to prevent the court from ruling that TTC had “care, custody or control” of the container.

The Meaning of ‘Collapse’

In 2014, renovations at the Masters Apartments revealed “substantial structural impairment” due to decayed rim joists.

CHL LLC, owner of the Seattle apartment complex, submitted a claim to American Economy Insurance Co., which had issued commercial property insurance from 1999 to 2005. An engineer hired by the insurer said the structural damage occurred between 1999 and 2002, and that a building inspector would classify it as a “dangerous” building.

American Economy denied CHL’s claim, saying the damage did not trigger coverage, as “collapse,” as defined by the policy from 2002 to 2005, required the building to fall down or be in imminent danger of falling down for a claim to be paid. (Prior to 2002, the term “collapse” was undefined.)

The insurance company filed a lawsuit in the U.S. District Court for the Western District of Washington at Seattle seeking a judgment that it did not need to indemnify the claim.

On July 7, the court ruled in favor of the insurance company and dismissed the case.

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Given that Masters Apartments remained upright for 12 years after the apparent decay occurred, the court ruled, the building did not reach a state of collapse between 1999 and 2002, when American Economy provided coverage.

Scorecard: The insurance company did not need to pay for renovations to the apartment complex.

Takeaway: Depending on the state, interpretation of “collapse” can range from a building that has a non-imminent substantial impairment of structural integrity to a building that has actually fallen down.

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

More from Risk & Insurance

More from Risk & Insurance

2017 RIMS

Resilience in Face of Cyber

New cyber model platforms will help insurers better manage aggregation risk within their books of business.
By: | April 26, 2017 • 3 min read

As insurers become increasingly concerned about the aggregation of cyber risk exposures in their portfolios, new tools are being developed to help them better assess and manage those exposures.

One of those tools, a comprehensive cyber risk modeling application for the insurance and reinsurance markets, was announced on April 24 by AIR Worldwide.

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Last year at RIMS, AIR announced the release of the industry’s first open source deterministic cyber risk scenario, subsequently releasing a series of scenarios throughout the year, and offering the service to insurers on a consulting basis.

Its latest release, ARC– Analytics of Risk from Cyber — continues that work by offering the modeling platform for license to insurance clients for internal use rather than on a consulting basis. ARC is separate from AIR’s Touchstone platform, allowing for more flexibility in the rapidly changing cyber environment.

ARC allows insurers to get a better picture of their exposures across an entire book of business, with the help of a comprehensive industry exposure database that combines data from multiple public and commercial sources.

Scott Stransky, assistant vice president and principal scientist, AIR Worldwide

The recent attacks on Dyn and Amazon Web Services (AWS) provide perfect examples of how the ARC platform can be used to enhance the industry’s resilience, said Scott Stransky, assistant vice president and principal scientist for AIR Worldwide.

Stransky noted that insurers don’t necessarily have visibility into which of their insureds use Dyn, Amazon Web Services, Rackspace, or other common internet services providers.

In the Dyn and AWS events, there was little insured loss because the downtime fell largely just under policy waiting periods.

But,” said Stransky, “it got our clients thinking, well it happened for a few hours – could it happen for longer? And what does that do to us if it does? … This is really where our model can be very helpful.”

The purpose of having this model is to make the world more resilient … that’s really the goal.” Scott Stransky, assistant vice president and principal scientist, AIR Worldwide

AIR has run the Dyn incident through its model, with the parameters of a single day of downtime impacting the Fortune 1000. Then it did the same with the AWS event.

When we run Fortune 1000 for Dyn for one day, we get a half a billion dollars of loss,” said Stransky. “Taking it one step further – we’ve run the same exercise for AWS for one day, through the Fortune 1000 only, and the losses are about $3 billion.”

So once you expand it out to millions of businesses, the losses would be much higher,” he added.

The ARC platform allows insurers to assess cyber exposures including “silent cyber,” across the spectrum of business, be it D&O, E&O, general liability or property. There are 18 scenarios that can be modeled, with the capability to adjust variables broadly for a better handle on events of varying severity and scope.

Looking ahead, AIR is taking a closer look at what Stransky calls “silent silent cyber,” the complex indirect and difficult to assess or insure potential impacts of any given cyber event.

Stransky cites the 2014 hack of the National Weather Service website as an example. For several days after the hack, no satellite weather imagery was available to be fed into weather models.

Imagine there was a hurricane happening during the time there was no weather service imagery,” he said. “[So] the models wouldn’t have been as accurate; people wouldn’t have had as much advance warning; they wouldn’t have evacuated as quickly or boarded up their homes.”

It’s possible that the losses would be significantly higher in such a scenario, but there would be no way to quantify how much of it could be attributed to the cyber attack and how much was strictly the result of the hurricane itself.

It’s very, very indirect,” said Stransky, citing the recent hack of the Dallas tornado sirens as another example. Not only did the situation jam up the 911 system, potentially exacerbating any number of crisis events, but such a false alarm could lead to increased losses in the future.

The next time if there’s a real tornado, people make think, ‘Oh, its just some hack,’ ” he said. “So if there’s a real tornado, who knows what’s going to happen.”

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Modeling for “silent silent cyber” remains elusive. But platforms like ARC are a step in the right direction for ensuring the continued health and strength of the insurance industry in the face of the ever-changing specter of cyber exposure.

Because we have this model, insurers are now able to manage the risks better, to be more resilient against cyber attacks, to really understand their portfolios,” said Stransky. “So when it does happen, they’ll be able to respond, they’ll be able to pay out the claims properly, they’ll be prepared.

The purpose of having this model is to make the world more resilient … that’s really the goal.”

Additional stories from RIMS 2017:

Blockchain Pros and Cons

If barriers to implementation are brought down, blockchain offers potential for financial institutions.

Embrace the Internet of Things

Risk managers can use IoT for data analytics and other risk mitigation needs, but connected devices also offer a multitude of exposures.

Feeling Unprepared to Deal With Risks

Damage to brand and reputation ranked as the top risk concern of risk managers throughout the world.

Reviewing Medical Marijuana Claims

Liberty Mutual appears to be the first carrier to create a workflow process for evaluating medical marijuana expense reimbursement requests.

Cyber Threat Will Get More Difficult

Companies should focus on response, resiliency and recovery when it comes to cyber risks.

RIMS Conference Held in Birthplace of Insurance in US

Carriers continue their vital role of helping insureds mitigate risks and promote safety.

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