The Law

Legal Spotlight

A look at the latest decisions impacting the industry.
By: | December 14, 2016 • 4 min read

Social Engineering Claim Fails

In March 2013, an employee in Apache Corp.’s Scotland office received a telephone call informing the company of a changed bank account for Petrofac, a vendor. The Apache employee replied that a formal request on Petrofac letterhead was required.

A week later, Apache’s accounts payable department received an email from petrofacltd.com (the true website was petrofac.com) with an attached letter related to the change of bank account. The email said the letter had been sent by mail as well.

The Apache employee called the phone number on the letter to confirm the request and subsequently, about $7 million was sent to the new bank account in payment of invoices. Within the month, Apache learned that it had been duped, and was able to retrieve “a substantial portion of the funds.” It did lose about $2.4 million, according to court documents.

Businessman Sitting In Front Of Computer Holding Calculator

It filed a claim with Great American Insurance Co. under the “computer fraud” provision of its crime-protection insurance policy, which had a $1 million deductible. The insurer denied the claim, stating the “loss did not result directly from the use of a computer nor did the use of a computer cause the transfer of funds.”

A Texas court ruled on behalf of Apache, after it had filed suit. The U.S. 5th Circuit Court of Appeals reversed that decision on Oct. 18.

“The email was part of the scheme; but, the email was merely incidental to the occurrence of the authorized transfer of money,” the court ruled, noting that “few — if any — fraudulent schemes would not involve some form of computer-facilitated communication.”

Scorecard: The insurance company did not have to cover the $2.4 million loss.

Takeaway: The decision will limit coverage for crime policy claims related to social-engineering scams.

‘Faulty Workmanship’ Dooms Claim

In December 2011, Kim’s Asia Construction removed the existing roof at Powerline Imports Inc. and installed a new one. Powerline said the new roof “leaks worse than before it was replaced,” according to court documents.

Additional repairs did not resolve the problem and eventually, Kim’s Asia Construction stopped responding to Powerline’s phone calls. Powerline engaged a new contractor to remove and dispose of the new roof, and filed suit against Kim’s in the Superior Court of Bergen County, N.J.

Kim’s sought defense and indemnification from State Farm Fire and Casualty Co., under its business liability insurance policy. The insurance company initially granted a defense but filed a lawsuit in the U.S. District Court for the Eastern District of Pennsylvania seeking a judgment that it owed neither defense nor indemnification.

That judgment was granted to State Farm on Oct. 5.

The court ruled that “faulty workmanship” is not considered an occurrence that would trigger a bodily injury or property damage claim.

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“Under Pennsylvania law, such claims are not covered under the definition of ‘accident’ required to establish an ‘occurrence’ under the policy,” the court ruled.

Scorecard: The insurer does not have to defend the construction company in the lawsuit filed against it for “negligent construction” of a new roof.

Takeaway: The policy defined an occurrence as “an accident,” and the lawsuit did not allege “anything ‘unexpected,’ ‘unintentional,’ or ‘fortuitous’ about the damage to the roof.

Insurer Need Not Cover Thefts

John Clemmons was an estate lawyer who stole $1.3 million from his clients and gambled it away, according to reports. He was disbarred and sentenced to 18 years in prison.

The new administrator of two of the estates filed suit against Clemmons for misappropriating the funds and failing to account for the assets. It also claimed Clemmons failed to obtain adequate surety bonds as required by state law.
Hanover Insurance Co., which had issued a legal professional liability policy to Clemmons, sought a court declaration that it had no obligation to defend or indemnify Clemmons.

Businessman Being Arrested

The U.S. District Court in Nashville, Tenn., agreed with the insurer on Sept. 30.
The policy, the court ruled, excluded any claims caused by the “insured committing any intentional, dishonest, criminal, malicious or fraudulent act or omission.”

In addition, it said that the negligent failure to purchase surety bonds in the state’s mandated amounts were “outside the scope of coverage” of the policy, and that the claim was filed about a year after the claims-made policy lapsed.

The court also ruled that failure to obtain proper surety bonds “was not a ‘substantial factor in producing the damage or injury’ to the estates,” citing the attorney’s theft as the “substantial cause of the loss.”

Scorecard: The insurer does not have to defend or indemnify the incarcerated attorney for breach of fiduciary duty and misappropriation of funds.

Takeaway: The claims are outside the scope of coverage because the attorney “could have reasonably foreseen” the misappropriation claims against him and that Hanover would not have provided coverage for his thefts.

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]