2222222222

The Law

Legal Spotlight

A look at the latest decisions impacting the industry.
By: | February 20, 2017 • 4 min read

Insurer Must Pay Portion of $2.4 Million in Damages

After construction of a 53-unit N.J. condominium building was completed in 2004, unit owners began complaining of leaky roofs and windows.

Cypress Point Condominium Association filed suit against Aria Towers LLC, Metro Homes LLC and Commerce Construction Management LLC (collectively, the “developer”) and various subcontractors hired by the developer including MDNA Framing Inc., which framed the building and installed the windows. The cost to replace and repair the façade was $2.4 million.

The developer sought a defense and indemnification from Evanston Insurance Co., which had issued four commercial general liability policies from 2002 to 2006. The insurer refused. The condo association then sought a determination from the court as to whether its claims against the developer were covered by Evanston’s CGL policies.

Evanston subsequently filed a complaint against Crum & Forster Specialty Co., which had issued CGL policies from 2006 to 2010 to the developer, and a commercial excess liability policy from 2008 to 2009. The suit asked that Crum & Forster share in any responsibility.

A N.J. trial court dismissed the condo’s complaint, agreeing with the insurers that faulty workmanship did not constitute property damage or an occurrence, as defined by the policies. The court ruled the developer owed the condo association $789,931 (33 percent of the total damages), and MDNA owed it $957,493 (40 percent of the total damages).

A state appeals court subsequently ruled the damages did constitute property damage. The state Supreme Court affirmed. The case was returned to the trial court to determine whether any exclusions in the policies would apply.

On Dec. 5, the court found that Evanston’s exclusions in its 2004 policy do not cover “consequential damages flowing from faulty window installation” or mold removal. At the same time, it dismissed Crum & Foster from the case because the damage predated the policies.

The policies, however, only covered “common areas” of the condo, so further hearings will determine what costs are covered. The court dismissed the condo’s individual owners from the case, permitting them to file separately for damages.

Scorecard: Further legal proceedings will determine how much of the $2.4 million in damage, minus a $50,000 self-insured retention, should be paid by Evanston.

Takeaway: The insurance company must pay “reasonable costs that are directly related to the cost of repairing consequential damages” to the condo’s common areas.

Rape Damages Not Covered

In 2011, an 18-year-old woman was served alcohol laced with rohypnol while discussing “career opportunities in the food service industry” with Ajredin “Danny” Deari, owner of Pastazios Pizza, and another man.

The woman regained consciousness in a nearby hotel room as Deari allegedly sexually assaulted her. He subsequently confessed to aggravated assault.

In 2013, the woman sued the pizzeria, Deari and the other man for bodily injury, sexual assault and negligence. Century Surety Co., which had issued a commercial general liability policy to the pizzeria, subsequently sought a court order that it had no duty to defend or indemnify the pizzeria or Deari.

After a trial, the woman was awarded $21.5 million in damages from Deari and the pizzeria, which earlier declared bankruptcy. The U.S. District Court in Dallas ruled on Jan. 4 that Century had no responsibility for the bodily injury coverage because the policy required the “occurrence” to be “an accident.”

Advertisement




As for the negligence claim, the court ruled the exclusion for occurrences where the “proximate or contributing cause” arose from “liquor liability” applied to the case. It rejected the argument from the bankruptcy trustee for the pizzeria that the exclusion did not apply because neither alcohol nor rohypnol were licensed to be sold by the pizzeria, and thus could not be considered “products” under the policy.

Scorecard: The insurance company does not have to indemnify the pizzeria or its owner for the $21.5 million judgment.

Takeaway: Because the conduct was intentional, coverage for an “occurrence,” which was defined as an “accident,” is excluded.

Staffing Company Nurse Ruled an Employee

In 2010, an induced birth resulted in neonatal asphyxia, resulting in permanent brain damage. Two years later, the parents of the injured child sued Laurel Regional Hospital in Maryland and several of its doctors and nurses. The case against one of the nurses, Marie Cryer, who had been placed at the hospital by Favorite Healthcare Staffing, ultimately settled for $2.5 million.

That amount plus the defense, costing about $500,000, were paid for by Interstate Fire and Casualty Co., which issued a professional liability policy to Favorite Healthcare Staffing. Interstate sought reimbursement from Dimensions Assurance Ltd., a captive owned by the hospital.

Dimensions, which provided general and professional liability coverage, rejected the claim, stating that Cryer was not an employee.

A district court in Maryland upheld that argument, and Interstate appealed. The U.S. 4th Circuit Court of Appeals reversed the decision on Dec. 6, ruling that the hospital’s control over Cryer made her “an employee of the hospital as a matter of law.”

The court also noted that while the general liability portion of the Dimensions policy specifically excluded “agency-provided practitioners,” the professional liability section did not.

Scorecard: The hospital’s captive insurance company may be responsible for the $3 million malpractice case costs.

Takeaway: The court ruled the definitions in the insurance policy superseded the staffing company agreement.

Anne Freedman is managing 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.

Advertisement




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.

Advertisement




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.”

Advertisement




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.

Advertisement




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]