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The Law

Legal Spotlight

A look at the latest court decisions impacting the insurance industry.
By: | August 29, 2017 • 4 min read

School District Protected in Contaminated Water Suit

In August 2016, Butler area school district received test results indicating its water supply was tainted with lead and copper from the school’s pipes. The school district informed students and their families of the contamination in mid-January 2017.

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On February 7, parents filed a class-action lawsuit against the western Pennsylvania school district, seeking an unspecified monetary settlement for allegedly hiding the lead and copper levels for months and putting their children in harm’s way.

The district held a general liability policy through The Netherlands Insurance Co. and an umbrella policy from Peerless Insurance Co. The insurers believed they did not have to defend the district because the water contamination claims fell under their policies’ general exclusions for pollutants. More specifically, the claims fell under exclusions for lead exposure.

On February 17, 2017, Netherlands and Peerless informed the school district that they would not participate in the defense of the school nor would they pay for the parents’ monetary damages recoverable by law. The insurers sought a court declaratory judgment stating that neither had an obligation to defend the school district.

The judge ruled that the policies presented by both insurers exclude damages “arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants,’ ” but noted that Pennsylvania courts have found this language to not accurately describe the degradation over time that causes lead exposure from lead-based paint.

Similarly, the lead and copper elements of the school district’s water system degraded over time, rendering the lead and copper bioavailable.

Additionally, the judge said that because there was no specific copper exclusion in the policies, the insurers were obligated to provide defense coverage in the class-action suit.

Scorecard: The two insurance companies, Netherlands and Peerless, have a duty to defend the Butler Area School District.

Takeaway: Where exclusion language is deemed ambiguous, courts more often than not rule in favor of insureds.

Insurer Not Responsible for Landslide Damages

Dimitri and mary chaber owned and operated a motorcycle business in St. Albans, W. Va., when rock and soil slid down a hill at the back of the property. The landslide damaged the shop on February 19, 2014, and the Chabers, covered by Erie Insurance, submitted a claim.

Erie sent an adjuster to examine the property damage totaling nearly $4,000. The adjuster determined that seasonal climate change caused the landslide.

The Chabers believed the landslide originated from an improperly performed excavation. After the adjuster explained to the Chabers that their policy specifically stated earth-movement events were excluded from coverage, the Chabers filed suit.

In February 2016, a state circuit court granted the Chabers a declaratory judgment stating that evidence showed natural and man-made interaction caused the landslide. The policyholder, then, could expect coverage for the landslide, because the policy did not unambiguously exclude damage caused by man-made earth-movement events.

Erie argued that the language within the policy unambiguously excluded coverage for all earth movement, regardless of whether it is man-made or natural.

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In an appeal held in April 2017, the Supreme Court of Appeals of West Virginia reversed the declaratory judgment granted to the Chabers and found the language of the exclusion unambiguously embraced both natural and man-made causes.

Scorecard: Erie Insurance does not have to cover $4,000 in landslide damages incurred by its policyholder.

Takeaway: If a policy excludes a particular event unambiguously, the exclusion should apply regardless of the event’s cause.

‘Pervasive Odor’ Covered Under Policy

Residents were plagued with a pervasive odor coming from the Hillcrest Coatings Inc., plant located near Attica, N.Y.

Hillcrest operated a glass and paper recycling facility and was sued for allegedly creating the odor due to negligent operation. Hillcrest sought coverage from its general liability policy issued by Colony Insurance Co. Colony refused coverage and did not budge.

Hillcrest sued in state court, seeking a declaratory judgment that Colony had a duty to defend and indemnify the plant. The court ruled that Colony must defend Hillcrest, but the indemnification issue proved nonconclusive.

Colony appealed the ruling and countered that its policy contained a hazardous materials exclusion that exempted it from covering the defense for the underlying suit. The exclusion barred coverage for bodily injury or property damage that may have been caused by the discharge of hazardous materials. Within Colony’s definition, waste materials — such as glass or paper — used in the recycling process are a type of hazardous material.

The case was brought in front of a New York appellate panel of five judges. The court ruled in favor of Hillcrest, because “foul odors are not always caused by the discharge of hazardous materials,” the panel said.

Further, no claims of bodily harm or property damage were filed with the underlying suit. Because the hazardous material exclusion was triggered by bodily harm and physical damage, the court determined Colony had a duty to defend Hillcrest.

Scorecard: The cause of the odor could not be linked to a discharge of hazardous materials, therefore the insurer must defend Hillcrest Coatings Inc.

Takeaway: For an exclusion to be triggered, the policy language must directly apply to the situation at hand.

Autumn Heisler is the digital producer and a staff writer at 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.

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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.

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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.”

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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.

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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]