The Law

Legal Spotlight

A look at the latest decisions impacting the industry.
By: | May 2, 2017 • 4 min read

Losses Due to Emails Not Covered

On june 4, 2012, an employee of accounting firm Taylor & Lieberman (T&L) received an email from a client requesting a wire transfer to a bank account in Malaysia in the amount of $94,280.

After complying with those instructions, she received another email the next day, requesting an additional $98,486 be wired to a bank in Singapore. The employee again complied. A third email request, in the amount of $128,101, raised suspicions because of a different email address.

A phone call confirmed that all three emails were fraudulent. T&L was able to recover nearly all of the monies from the first transfer, but none from the second.

The accounting firm used its own funds to reimburse the client and then sought reimbursement under its crime coverage with Federal Insurance Co., which denied the claim on June 13, 2012.

Two years later, the U.S. District Court for the Central District of California ruled the firm was not entitled to coverage. On March 9, the U.S. 9th Circuit Court of Appeals agreed.

The policy, the court ruled, provided coverage for “an insured’s direct loss ‘resulting from forgery or alteration of a financial instrument by a third party.’ ” In this case, there were no financial instruments, just emails instructing the firm to wire money.

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The court also dismissed T&L’s argument that the claim was covered by computer fraud coverage because the emails were an unauthorized entry into its system.
“The ‘mere sending’ of emails does not amount to actionable trespass to a computer system,” ruled the 9th Circuit, which dismissed the case.

Scorecard: The accounting firm’s claim for $98,486 was denied.

Takeaway: The “common sense reading of the policy” contradicted the accounting firm’s arguments, the court ruled.

Insurer Must Pay for Appeal

On dec. 13, 2011, a federal grand jury indicted Mitchell Stein on 14 counts of mail, wire and securities fraud, saying he artificially inflated the stock of Heart Tronics (also known as Signalife), a medical device company.

On Dec. 20, 2011, the SEC filed a civil suit against Stein and Heart Tronics for securities fraud and falsification of records.

Stein, a founder of the company who called himself its “chief creative architect,” was found guilty of the criminal charges, sentenced to 17 years in prison and ordered to repay $5 million in “illegally-gained profits” on May 20, 2013. The SEC action resulted in Stein being ordered to pay $5.4 million.

After his criminal conviction (which subsequently was remanded for resentencing earlier this year), Stein sought defense for an appeal from Houston Casualty Co., which had issued a $5 million directors and officers policy in November 2007.

HCC denied the claim, saying the policy provided coverage only until a “final determination,” which it said was the conviction. It also argued that Stein was not an officer or director of the company.

Stein filed suit, and lost in the Superior Court of Los Angeles County. That decision was reversed by the California Court of Appeal, Second Appellate District, on March 8.

Even though Stein denied being an officer of the company in other court proceedings, his statements “do not contradict” the argument that Stein was the functional equivalent of an officer or director during the HCC policy period, the court ruled.

It also said the policy defined a claim as “any civil or criminal proceeding, and expressly included ‘an appeal from any such proceeding.’ ”

Scorecard: The insurance company must pay for the costs to appeal the conviction.

Takeaway: A “thing that is ‘final until reversed’ is not final,” the court ruled.

Maritime vs. State Law

In february 2011, peter savoie and matt delahoussaye used a crane barge to attempt to dislodge solid objects from inside an offshore well in the Atchafalaya Basin in Louisiana.

Savoie was preparing to disconnect the hydraulic gate valve from the crane when the crane came toward him and knocked him off balance. He tried to clutch the crane, but lost his grip and fell about 8 feet, resulting in a “crush-type injury to the right lower extremity.”

Savoie eventually settled his claims against his employer, Specialty Rental Tools & Supply (STS). The master services contract (MSC) had required STS to indemnify Apache Corp., which had hired STS to perform the “flow-back process” on its fixed production platform.

The MSC stated it should be enforced under maritime law unless it was inapplicable.

Even though the injury case was settled, crane owner Larry Doiron Inc. and crane operator Robert Jackson, both of whom are part of Apache, sought a court ruling that would “enforce their contractual right to defense and indemnification” under admiralty law.

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Zurich American Insurance Co., which had issued the policy for the MSC, argued the indemnity provision was void under the Louisiana Oilfield Indemnity Act.

The U.S. District Court for the Western District of Louisiana agreed with Doiron and Jackson that it had a right to defense and indemnity, and that state law did not apply. On appeal by STS, Zurich and Oil States Energy Services, the U.S. 5th Circuit Court of Appeals on Feb. 23 agreed.

While flow-back activities have little to do with traditional maritime activity, it ruled, a vessel was necessary to do the work.

Scorecard: The insurer must defend and indemnify the barge owner.

Takeaway: Because the operation could not be completed with the vessel’s crane, the case was decided under maritime law.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at afreedman@lrp.com.

More from Risk & Insurance

More from Risk & Insurance

2017 Risk All Stars

Immeasurable Value

The 2017 Risk All Stars strengthened their organizations by taking ownership of improved risk management processes and not quitting until they were in place.
By: | September 12, 2017 • 3 min read

Being the only person to hold a particular opinion or point of view within an organization cannot be easy. Do the following sound like familiar stories? Can you picture yourself or one of your risk management colleagues as the hero or heroine? Or better yet, as a Risk & Insurance® Risk All Star?

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One risk manager took a job with a company that was being spun off, and the risk management program, which was built for a much larger company, was not a good fit for the spun-off company.
Rather than sink into inertia, this risk manager took the bull by the horns and began an aggressive company intranet campaign to instill better safety and other risk management practices throughout the organization.

The risk manager, 2017 Risk All Star Michelle Bennett of Cable One, also changed some long-standing brokerage relationships that weren’t a good fit for the risk management and insurance program. In her first year on the job she produced premium savings and in her second year is in the process of introducing ERM company-wide.

Or perhaps this one rings a bell. The news is trickling out that a company is poised to dramatically expand, increasing the workforce three- or four-fold. Having this knowledge with certainty would be a great benefit to a risk manager, who could begin girding safety, workers’ comp and related programs accordingly. But things sometimes don’t work that way, do they? Sometimes the risk manager is one of the last people to know.

The Risk All Star Award recognizes at its core, creativity, perseverance and passion. The 13 winners of this year’s award all displayed those traits in abundance.

In the case of 2017 Risk All Star winner Steve Richards of the Coca-Cola Bottling Company, the news of an expansion spurred him to action. He completely overhauled the company’s workers’ compensation program and streamlined its claim management system. The results, even with a much higher headcount, were reduced legal costs, better return-to-work experiences for injured workers and a host of other improvements and savings.

The Risk All Star Award recognizes at its core, creativity, perseverance and passion. The 13 winners of this year’s award all displayed those traits in abundance. Sometimes it took years for a particular risk solution, as promoted by a risk manager, to find acceptance.

In other cases a risk manager got so excited about a solution, they never even considered getting turned down. They just kept pushing until they carried the day.

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Butler University’s Zach Finn became obsessive about what he felt was a lackluster effort on the part of the insurance industry to bring in new talent. The former risk manager for the J.M. Smucker Co. settled on the creation of a student-run captive to give his risk management students the experience they would need to get hired right out of college.

The result was a better risk management program for the university’s College of Liberal Arts and Sciences, and immediate traction in the job market for Finn’s students.

A few of our Risk All Stars told us that the results they are achieving were decades in the making. Only by year-in, year-out dedication to gaining transparency about her co-op’s risks and learning more and more about her various insurance carriers, did Growmark Inc.’s Faith Cring create a stalwart risk management and insurance program that is the envy of the agricultural sector. Now she’s been with some of her insurance carriers more than 20 years — some more than 30 years.

Having the right idea and not having a home for it can be a lonely, frustrating experience. Having the creativity, the passion and perhaps, most importantly, the perseverance to see it through and get great results makes you a Risk All Star. &

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Risk All Stars stand out from their peers by overcoming challenges through exceptional problem solving, creativity, perseverance and passion.

See the complete list of 2017 Risk All Stars.

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at dreynolds@lrp.com.