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 [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Management

The Profession

Pinnacle Entertainment’s VP of enterprise risk management says he’s inspired by Disney’s approach to risk management.
By: | November 1, 2017 • 4 min read

R&I: What was your first job?

Bus boy at a fine dining restaurant.

R&I: How did you come to work in this industry?

I sent a résumé to Harrah’s Entertainment on a whim. It took over 30 hours of interviewing to get that job, but it was well worth it.

R&I: If the world has a modern hero, who is it and why?

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The Chinese citizen (never positively identified) who stood in front of a column of tanks in Tiananmen Square on June 5, 1989. That kind of courage is undeniable, and that image is unforgettable. I hope we can all be that passionate about something at least once in our lives.

R&I: What emerging commercial risk most concerns you?

Cyber risk, but more narrowly, cyber-extortion. I think state sponsored bad actors are getting more and more sophisticated, and the risk is that they find a way to control entire systems.

R&I: What is the riskiest activity you ever engaged in?

Training and breaking horses. When I was in high school, I worked on a lot of farms. I did everything from building fences to putting up hay. It was during this time that I found I had a knack for horses. They would tolerate me getting real close, so it was natural I started working more and more with them.

Eventually, I was putting a saddle on a few and before I knew it I was in that saddle riding a horse that had never been ridden before.

I admit I had some nervous moments, but I was never thrown off. It taught me that developing genuine trust early is very important and is needed by all involved. Nothing of any real value happens without it.

R&I: What about this work do you find the most fulfilling or rewarding?

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Setting very aggressive goals and then meeting and exceeding those goals with a team. Sharing team victories is the ultimate reward.

R&I: What is the most unusual/interesting place you have ever visited?

Disney World. The sheer size of the place is awe inspiring. And everything works like a finely tuned clock.

There is a reason that hospitality companies send their people there to be trained on guest service. Disney World does it better than anyone else.

As a hospitality executive, I always learn something new whenever I am there.

James Cunningham, vice president, enterprise risk management, Pinnacle Entertainment, Inc.

The risks that Disney World faces are very similar to mine — on a much larger scale. They are complex and across the board. From liability for the millions of people they host as their guests each year, to the physical location of the park, to their vendor partnerships; their approach to risk management has been and continues to be innovative and a model that I learn from and I think there are lessons there for everybody.

R&I: What is the risk management community doing right?

We are doing a much better job of getting involved in a meaningful way in our daily operations and demonstrating genuine value to our organizations.

R&I: What could the risk management community be doing a better job of?

Educating and promoting the career with young people.

R&I: What have you accomplished that you are proudest of?

Being able to tell the Pinnacle story. It’s a great one and it wasn’t being told. I believe that the insurance markets now understand who we are and what we stand for.

R&I: Who is your mentor and why?

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John Matthews, who is now retired, formerly with Aon and Caesar’s Palace. John is an exceptional leader who demonstrated the value of putting a top-shelf team together and then letting them do their best work. I model my management style after him.

R&I: What is your favorite book or movie?

I read mostly biographies and autobiographies. I like to read how successful people became successful by overcoming their own obstacles. Jay Leno, Jack Welch, Bill Harrah, etc. I also enjoyed the book and movie “Money Ball.”

R&I: What is your favorite drink?

Ice water when it’s hot, coffee when it’s cold, and an adult beverage when it’s called for.

R&I: What does your family think you do?

In my family, I’m the “Safety Geek.”

R&I:  What’s your favorite restaurant?

Vegas is a world-class restaurant town. No matter what you are hungry for, you can find it here. I have a few favorites that are my “go-to’s,” depending on the mood and who I am with.

If you’re in town, you should try to have at least one meal off the strip. For that, I would suggest you get reservations (you’ll need them) at Herbs and Rye. It’s a great little restaurant that is always lively. The food is tremendous, and the service is always on point. They make hand-crafted cocktails that are amazing.

My favorite Mexican restaurant is Lindo Michoacan. There are three in town, and I prefer the one in Henderson as it has the best view of the valley. For seafood, you can never go wrong with Joe’s in Caesar’s Palace.




Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]