The Law

Legal Spotlight

A look at the latest decisions impacting the industry.
By: | July 6, 2017 • 4 min read

Court Rules on Electronic Data Exclusion

Beginning in 2007, Country World Media Group stored boxes of taped television shows, master copies and field footage at offices used by Country World Productions in Wisconsin.

In 2014, the media group discovered that Best Built Inc., lease manager for the premises, threw the boxes of tapes and other items, valued at about $1 million, in the trash.

The media group filed suit against Country World Productions (CWP), Best Built, VHC (owner of the property) and Craig Kassner, owner of Best Built, along with their insurance companies, claiming breach of contract and negligence.

Erie Insurance Co., which provided CWP with a commercial general liability policy, denied the claim, saying that the loss of “electronic data” was excluded from the policy’s definition of property damage.

On April 27, 2016, a circuit court in Wisconsin ruled Erie did not have a duty to defend CWP against the claim because of the electronic data exclusion. It dismissed Erie from the case.
CWP appealed to the state Court of Appeals, arguing Erie was liable for CWP’s ultimate settlement with Country World Media Group, as well as for all defense costs.

The appeals court ruled on May 2 that the media group experienced a loss of both intangible electronic data contained on the tapes, as well as the physical loss of the tapes themselves.


“The loss of the physical tapes constitutes property damage, as the policy defines that term, and is therefore covered,” the court wrote in reversing the lower court decision. It ruled that Erie had a duty to defend CWP on the claims, returning the case to the circuit court to enter a judgment in CWP’s favor, and to determine damages for Erie’s breach of contract.

Scorecard: The court will determine damages owed CWP for Erie’s failure to provide a defense.

Takeaway: While the property damage coverage excluded intangible electronic property, it did not exclude the tangible physical videotapes that held the TV shows and other footage.

Court: Insurer Should Have Investigated Misrepresentations

In April 2013, Sunwest Metals Inc. suffered a catastrophic fire at its recycling facility, and filed a claim with Star Insurance Co. under its Scrap Dealers Program policy.

While nearly two-thirds of Sunwest’s revenue came from paper processing, the insurance program limited policy issuance to companies that derived no more than 15 percent of their revenue from paper and plastics.

Through its broker, Thomas Dunlap Insurance Agency, Sunwest represented that nearly all of its revenue came from metals processing, according to court documents.

After Sunwest filed a claim for fire damage, Star rescinded the policy based on Dunlap’s misrepresentations, according to court documents.

A trial in the U.S. District Court for the Central District of California resulted in a judgment in favor of Sunwest of nearly $978,000, and the court determined Star had waived its right to rescind the policy by failing to investigate evidence of misrepresentation.

The U.S. 9th Circuit Court of Appeals agreed on May 18, ruling that Star had “information that ‘distinctly implied’ material misrepresentations, and that it failed to satisfy its duty to investigate such evidence. The duty of inquiry requires an insurer to not only ask questions, but also to investigate answers.”

It noted that Sunwest’s website advertised paper and plastic recycling, and that Star had made several site inspections that noted “substantial paper processing.”

The court also ruled the district court was correct when it reduced Star’s $978,000 claims payment by $232,000, to reflect the actual loss, when taking into account the amount of the recovery Sunwest received from Dunlap for “making erroneous representations to Star.”

Scorecard: Sunwest was awarded a total of $978,000 for property damage to its recycling facility.

Takeaway: The insurance company waived its right to rescind the policy because it ignored information that “distinctly implied” a misrepresentation of facts.

Carfax Denied a Defense in Antitrust Case

In 2013, about 470 auto dealers filed suit against Carfax Inc. for $50 million, claiming that it monopolized the sale of vehicle history reports by using “exclusive dealing arrangements” (a violation of the federal Clayton Act) and by “agreements in unreasonable restraint of trade” (a violation of the federal Sherman Act).

Illinois National Insurance Co. refused to defend Carfax in the federal antitrust suit, saying the Special Risk Protector policies it issued excluded coverage for, among other things, antitrust violations, unfair competition, or violations of the Sherman Act or the Clayton Act.

Arguing that the underlying lawsuit stigmatized and disparaged its company (both covered under the policy), Carfax filed suit against Illinois National seeking a ruling that the insurer had a duty to defend, as well as repay it for any defense costs.

The auto dealers’ lawsuit was eventually dismissed, but has been appealed.


On May 16, the Supreme Court of the State of New York dismissed the lawsuit against Illinois National.

“It is this anticompetitive injury, rather than disparagement, that forms the basis of the [underlying] litigation,” the court ruled.

The court ruled Illinois National did not have a duty to defend or to contribute to any defense costs.

Scorecard: The insurance company does not have to defend Carfax.

Takeaway: The underlying lawsuit was based on antitrust allegations, which were excluded under the policy.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Black Swans

Black Swans: Yes, It Can Happen Here

In this year's Black Swan coverage, we focus on two events: An Atlantic mega-tsunami which would wipe out the East Coast and a killer global pandemic.
By: | July 30, 2018 • 2 min read

One of the most difficult phrases to digest without becoming frustrated or judgmental is the oft-repeated, “I never thought that could happen here.”


Most painfully, we hear it time and time again in the aftermath of the mass school shootings that terrorize this country. Shocked parents and neighbors, viewing the carnage, voice that they can’t believe this happened in their neighborhood.

Not to be mean, but why couldn’t it happen in your neighborhood?

So it is with Black Swans, a phrase describing unforeseen events, made famous by the former trader and acerbic critic of academia Nassim Nicholas Taleb.

We at Risk & Insurance® define these events in insurance terms by saying that they are highly infrequent, yet could cause massive damages. This year, for our annual Black Swan issue, we present two very different scenarios, both of which would leave mass devastation in their wake.

A Mega-Tsunami Is Coming; Can the East Coast Even Prepare?, written by staff writer Autumn Heisler, profiles an Atlantic mega-tsunami, which would wipe out lives and commerce along the East Coast.

On the topic of whether the volcanic island of La Palma, the most northwestern of the Canary Islands, could erupt, split and trigger an Atlantic mega-tsunami, scientists are divided.

Researchers Steven Ward, a geophysicist at UC Santa Cruz, and Simon Day of University College London, say such a thing could happen. Other scientists say Day and Ward are dead wrong; it’s an impossibility.

One of the counter-arguments is backed up by the statement that there has never been an Atlantic mega-tsunami. It’s never happened before and thus, could never happen here. See exhibit “A” above, re: mass school shootings.

Viral Fear: How a Global Pandemic Kills an Economy, written by associate editor Katie Dwyer, depicts a killer global pandemic the likes of which hasn’t been seen in a century.

Tens of millions of people died during the Spanish Flu outbreak of 1918.

Why it could happen again includes the fact that it’s happened before. The science on influenzas, which are constantly mutating, also supports just how dangerous a threat they pose to millions of people beyond the reach of antibiotics.

Should a mutating avian flu, for example, spread widely, we could see a 10 percent drop in GDP, mostly from non-physical business interruption.

As always here, the purpose is to do exactly what insurance modelers and underwriters do; no matter how massive the event, we create scenarios, quantify possible losses and discuss risk mitigation strategies. &

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]