The Law

Legal Spotlight

A look at the latest decisions impacting the industry.
By: | March 3, 2017 • 4 min read

Insured-Vs.-Insured Exclusion Cited in Dismissal

Cheryl Sullivan became a member of the JEI board of directors in April 2013, upon the death of her father, Jerry Paulson, who had expanded a small butcher shop into JEI, a retail and grocery store chain in Minnesota, Wisconsin and Florida. Sullivan redeemed her 28 percent of all company shares a few months later, after which she and her daughters sued the company, saying that JEI’s directors “designed to lower the value of their shares.”

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Sullivan and her daughters reached a confidential settlement with JEI. The company sought coverage for the payment under a directors and officers policy issued by U.S. Specialty Insurance Co.

The insurer rejected the claim and JEI filed suit. After the U.S. District Court for the District of Minnesota ruled against JEI, it appealed to the U.S. 8th Circuit Court of Appeals.

On Jan. 11, the appeals court agreed with U.S. Specialty. The two main issues related to the policy’s insured-versus-insured exclusion and its allocation clause. The insured-versus-insured exclusion barred coverage for any suit brought by a former director of the company.

But Sullivan’s daughters were not former directors, and the allocation clause provided that losses should be allocated between covered and uncovered claims. The appeals court ruled that Sullivan was “an active participant” in the lawsuit as well as its “driving force.” Because of that, the policy’s allocation provision for coverage as long as a director or officer “did not solicit, assist or actively participate in the lawsuit” did not apply to Sullivan or her daughters.

Scorecard: The insurance company does not need to indemnify JEI for the settlement payment.

Takeaway: The allocation clause “does not restore coverage for a suit brought with the active participation of an insured person,” the court ruled.

Bird Flu Transmission is Crucial to Case

Farms in minnesota from eight to 20 miles away from rembrandt Enterprises’ egg-producing facilities euthanized their chickens due to avian bird flu in 2015. In April and May of that year, Rembrandt’s flock was infected and a month later, more than 9 million birds were euthanized.

Rembrandt filed a claim with Illinois Union Insurance Co., which had issued a premises pollution liability insurance policy. The policy insured Rembrandt’s farms from the “discharge, dispersal, release, escape, migration or seepage of any … irritant, contaminant, or pollutant … on, in, into, or upon [covered] land and structures.”

The carrier denied the claim, saying the flu was not a contaminant and that coverage excluded losses relating to “naturally occurring materials” unless they were present because of human activities. Illinois Union Insurance later conceded the flu was a contaminant, but said there was no proof that human activities led to the bird flu being transmitted to Rembrandt’s farms. Rembrandt filed suit, claiming the carrier breached its policy. The carrier sought to dismiss the case.

An infectious diseases expert on behalf of Rembrandt said the bird flu was “detected in air samples taken inside and outside infected poultry houses,” and that the flock depopulations at nearby farms created a “virus cloud” that carried the flu to Rembrandt’s farms.

On Jan. 12, the U.S. District Court for the District of Minnesota refused to dismiss the case, ruling further hearings were needed.

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“Despite extensive briefing, on this record, the Court is simply not in a position to determine as a matter of law how the bird flu spread to Rembrandt’s farms and, accordingly, neither party is entitled to summary judgment,” the court ruled.

Scorecard: No decision was issued on whether the farms will collect for the loss of more than 9 million birds.

Takeaway: While the disease may be spread by air, it is not clear whether it was aided by human activity.

Court: Policy Excludes $64 Million Claim

Imprudent loans, resulting in more than $64 million in losses, caused the California Department of Financial Institutions to close Security Pacific Bank.

The Federal Deposit Insurance Corp. (FDIC), which was named receiver, filed suit against BancInsure Inc., seeking coverage for losses “arising from the negligence, gross negligence and breach of fiduciary duty allegedly committed by” the failed bank’s former directors and officers.

The U.S. District Court for the Central District of California concluded that the D&O policy issued by BancInsure covered the FDIC’s claims. The U.S. 9th Circuit Court of Appeals reversed that decision on Jan. 10.

The D&O policy excluded coverage for losses arising from legal actions brought by “any successor, trustee, assignee or receiver” of the bank. The FDIC argued that it is “not a ‘receiver’ within the meaning of the insured-versus-insured exclusion because, by statute, it has a ‘unique role’ representing ‘multiple interests,’ ”including shareholders and depositors. It pointed to an exception to the exclusion for “a shareholder’s derivative action,” which could be filed against the failed bank by shareholders who are not insureds under the D&O policy.

The appeals court rejected that argument. “We think the term ‘receiver’ is clear and unambiguous and includes the FDIC in its role as receiver of Security Pacific,” it ruled, ordering the lower court to dismiss the case.

Scorecard: The FDIC will not be able to collect more than $64 million in losses from BancInsure.

Takeaway: The right of the FDIC to bring a shareholder derivative action was secondary to the FDIC’s right to bring the same claims directly as the failed bank’s receiver.

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]