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

Business Interruption Risk

Hidden Risks of Violence

The Las Vegas shooting and other tragedies increase demand for non-physical damage BI coverages. The market is growing, but do new products meet companies’ new needs?
By: | December 14, 2017 • 5 min read

Mass shootings in the United States and the emergence of new forms of terrorism in Europe are boosting demand for insurance against losses caused by business interruption when a policyholder suffers no direct property damage, according to insurers.

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But brokers say coverage for non-physical damage BI (NDBI), needs to evolve to better meet the emerging needs of corporate clients.

For years, manufacturing clients sought a more comprehensive range of NDBI coverages, especially due to the indirect effects of natural catastrophes such as the Thai floods that disrupted global supply chains in 2011.

More recently, however, hospitality and entertainment companies are expressing interest as they strive to adapt to realities such as the mass shootings in tourism hotspots Las Vegas and Orlando and terror attacks in such popular destinations as New York, Paris, Berlin, Barcelona and London.

In addition to loss of life and property, revenue loss is a real risk. Tragedies that cause a high number of fatalities can cause severe financial losses, especially for companies relying on tourism, as visitors shy away from crime scenes.

Precedents already exist. Paris received 1.5 million fewer visitors than expected in 2016, after the French capital was targeted by a series of deadly terror attacks the year before.

More recently, bookings declined in the immediate aftermath of a shooting at the Mandalay Bay Resort and Casino in Las Vegas that took the lives of 58 people on October 1: Bookings at the hotel have since recovered.

Joey Sylvester, national director of operations & planning, Public Sector, Gallagher

“The recent horrific mass shootings in Las Vegas, Nev., and in Sutherland Springs, Texas, raised awareness and concerns about similar events occurring in areas where the public congregates, such as entertainment venues like sporting events, concerts, restaurants, movie theaters, convention centers and more,” said Bob Nusslein, head of Innovative Risk Solutions Americas, Swiss Re CS.

“The second highest NDBI cover to natural catastrophes is terrorism, including active shooter and mass shootings.”

However, products available in the market do not always provide the protection companies would like. Active shooter coverages, for example, focus mostly on third-party liabilities that policyholders may face after a shooting.

Loss-of-attraction policies often define triggering events with a high degree of detail. These events may need to be characterized as a terrorist attack or act of war by authorities. In some cases, access to the venue needs to be officially cut off by police.

It follows that an attack by a 64-year old ex-accountant who shoots hundreds of people for no apparent reason — as was the case in the Mandalay Bay tragedy — isn’t likely to align with a typical policy trigger.

But insurers say they are trying to adapt to the evolving realities of both mass shootings and terrorism to meet the new needs expressed by clients.

“The active shooting coverage is drawing much interest in the U.S. market right now. In Europe, clients are increasingly inquiring about loss of attraction,” said Chris Parker, head of terrorism and political violence, Beazley.

“What we are doing at the moment is to try and cross these two kinds of products, so that a client can get coverage for the loss of attraction resulting from an active shooting event.”

Loss-of-attraction policies cover revenue loss derived from catastrophic events, and underwriters already offer alternatives that provide coverage, even when no property damage is involved.

To establish the reach of such a policy, buyers can define a trigger radius — a physical area defined in the policy. If a catastrophic event takes place within this radius, coverage will be triggered. This practice is sometimes called “cat in a box.”

Some products specify locations that, if hit by a catastrophic event, will result in lost revenue for the insured. For resorts or large entertainment complexes, for example, attacks on nearby airports could cause significant loss of revenue and could be covered by NDBI insurance.

Measuring losses is a challenge, and underwriters may demand steep retention levels. According to Parker, excess coverage may kick in after a 20 percent to 25 percent revenue drop.

Insurers will also want proof that the drop is related to the catastrophic event rather than economic downturn, seasonal variances or other factors.

“Capacity is very large for direct acts of terrorism but lower for indirect terrorism and violent acts because the exposure is far greater,” said Joey Sylvester, national director of operations & planning, Public Sector, Gallagher.

“Commercial businesses, public entities, religious and nonprofit organizations have various needs for this type of coverage, and the appetite is certainly trending upward.”

It is difficult to foresee which events will cause business disruption. As a result, according to Nusslein, companies generally prefer to purchase all-risk NDBI covers rather than named-perils coverage.

“The main reason is that, if they have coverage for four potential NDBI events and a fifth event occurs, the fifth event is not covered,” he said. “Insurers, new to NDBI covers, still prefer named-perils covers over all-risk cover.”

Current geopolitical tensions are also fueling buyers’ demands.

“Many companies want nuclear, biochemical, chemical and radiological exclusions removed from terrorism NDBI covers. While this is more difficult for insurers, it is not impossible,” Nusslein said.

“War risk NDBI cover is becoming more sought after due to political tensions between the U.S. and North Korea.”

“Many companies want nuclear, biochemical, chemical and radiological exclusions removed from terrorism NDBI covers. While this is more difficult for insurers, it is not impossible.” — Bob Nusslein, head of Innovative Risk Solutions Americas, Swiss Re CS

Natural catastrophes still constitute the largest share of perils underlying NDBI products.  Parametric indexes are increasingly employed to provide uncontroversial triggers to policies, said Duncan Ellis, U.S. property practice leader, Marsh.

These indexes range from rainfall levels and wind speed to the measured intensity of earthquakes. Interest in this kind of NDBI coverage expanded after the recent hurricane season.

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“The benefit of these products is that you do not have to go through the settlement process, which clients hate,” Ellis said.

NDBI policies are often bespoke, which is more common for very large insurance buyers.

“Usually, the market offers bespoke coverages for individual industries or clients, with very significant deductibles,” said Tim Cracknell, partner,  JLT Specialty.

NDBI cover can also help transfer regulatory and product recall risks. The life science sector is expressing interest in this kind of solution for cases where a supplier goes bankrupt or is shut down by a regulator, or a medication needs to be recalled due to perceived flaws in the manufacturing process.

Experts say that concerns still to be addressed are NDBI losses caused by cyber attacks and pandemics.

Capacity is an ongoing concern. According to Swiss Re CS, $50 million to $100 million, or even more, can be achieved through foundation capacity provided by a lead insurer, with syndicated capacity to other insurers and reinsurers, depending on the risk. &

Rodrigo Amaral is a freelance writer specializing in Latin American and European risk management and insurance markets. He can be reached at [email protected]