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The Law

Legal Spotlight

A look at the court latest decisions impacting the insurance industry.
By: | September 12, 2017 • 5 min read

Fraudulent Money Transfer Covered Under Policy

In the summer of 2014, Medidata Solutions Inc., was looking at a possible acquisition. The company notified its finance department “to be prepared to assist with significant transactions on an urgent basis.”

In September, finance received an email supposedly sent by Medidata’s president, containing his name, email address and picture.

Unfortunately, a hacker was behind the message.

The hacker — spoofing the company president’s email — told finance he was close to finalizing the acquisition, and an attorney would contact them regarding the next steps. Under the alias of attorney Michael Meyer, the hacker called the finance department and swindled the company out of $4.8 million. When Meyer asked for a second wire transfer, finance realized what had happened.

Medidata filed a claim on its $5 million crime policy with Federal Executive Protection, which covered losses occurring as a result of “fraudulent entry” or changing of data in the policyholder’s computer system.

On December 24, 2014, Federal denied the claim, arguing that there was no hack or “fraudulent entry” into Medidata’s computer system — the wire transfer was performed by Medidata employees, not by the hacker.

Both parties filed cross-motions for summary judgment.

The court held that even though the hacker had not performed the wire transfer directly, the “fraudulent entry” language applied, because the hacker used embedded computer code to trick Medidata’s servers into replacing the displayed email address and profile photo to that of the company president. The judge noted that Medidata’s employees “only initiated the transfer as a direct cause of” the hacker sending the modified emails posing as Medidata’s president.

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“Larceny by trick is still larceny,” said the court.

The district court granted Medidata’s motion for summary judgment.

Scorecard: Federal will have to cover Medidata’s $4.5 million loss.

Takeaway: This ruling is a sharp departure from court decisions in similar cases, but the court would likely have still ruled for the insurer if there had been no digital manipulation.

Lack of Information Leads to Insurer Victory

The U.S. Department of Justice and the office of the inspector general for the Department of Housing and Urban Development found First Horizon National Corporation and First Tennessee Bank National Association noncompliant with FHA-insured loan requirements.

The DOJ initially demanded a $610 million settlement in April 2014 after investigators notified the bank it was in violation of the False Claims Act.

The bank held coverage through eight insurance companies and sent a notice of circumstances to each insurer, explaining that the bank was cooperating with the DOJ. The notice concluded that the bank “established no liability for [the eventual outcome] and is not able to estimate a range of reasonably possible loss.” Not once did the bank reference the settlement demand in the notice.

By June 2015, the bank and the DOJ agreed on a settlement of $212.5 million. The bank expected to obtain the collective $75 million limits from its policies. All insurers denied coverage and the bank filed bad faith claims against them.

In June 2017, the court determined that because the bank failed to include the settlement demand in its initial notice, the insurers were not required to pay the $75 million in collective limits. It dismissed the bad faith claims and told the bank that its notice was “not reflective of the state of affairs at the time.”

Scorecard: Eight insurers did not have to pay their combined policy limits due to the omission of key information in the initial notice of circumstances.

Takeaway: An omission of vital information from an insured can lead to a positive court outcome for insurers.

‘Excess by Coincidence’ Policy Not True Excess Policy

In 2015, a property manager took an elderly man on a tour of the Dolce Living apartment complex in Houston via golf cart. The driver took a sudden left turn, throwing the man from the cart. He hit his head and died of his injuries days later. His widow sought $1 million in damages against the complex and the property manager.

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Dolce held a $1 million primary commercial GL policy through Lloyd’s of London and a $10 million excess policy through Colony Specialty Insurance Co. Pace Realty Corp., the manager of the complex, held a $1 million primary policy with North American Capacity Insurance Co.

The settlement exhausted Lloyd’s primary policy and left North American to pay the remainder. North American paid but then sued Colony, arguing the complex’s excess policy should have covered the remainder or, at the very least, split the bill with North American.

Because of wording in its policy that stated “… this insurance is excess over any other valid and collectible insurance available to you,” North American said its policy should be looked at as excess insurance only to be utilized after both the Lloyd’s and the Colony policies had been exhausted.

The Colony policy, argued North American, stated that its “excess condition … will not apply to insurance specifically written as excess over the coverage part.” North American said this clause should apply to its own policy, and Colony should be on equal legal footing as North American and split the costs between them.

The court had a different idea, calling Colony’s policy the “true excess” policy and North American the “excess by coincidence” policy. “NAC’s primary coverage limit of $1 million must be exhausted before Colony’s excess coverage is triggered.

“The NAC policy is a primary policy that is ‘excess by coincidence.’ The Colony umbrella policy is a true excess policy,” the judge wrote.

Scorecard: Colony Specialty Insurance Co., acting as an excess policy holder, does not have to pay on the Dolce Settlement.

Takeaway: If an excess policy is in place, all primary limits covering the same risk must be exhausted first, even if those policies are written to be excess in certain circumstances.

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

Risk Focus: Workers' Comp

Do You Have Employees or Gig Workers?

The number of gig economy workers is growing in the U.S. But their classification as contractors leaves many without workers’ comp, unemployment protection or other benefits.
By: and | July 30, 2018 • 5 min read

A growing number of Americans earn their living in the gig economy without employer-provided benefits and protections such as workers’ compensation.

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With the proliferation of on-demand services powered by digital platforms, questions surrounding who does and does not actually work in the gig economy continue to vex stakeholders. Courts and legislators are being asked to decide what constitutes an employee and what constitutes an independent contractor, or gig worker.

The issues are how the worker is paid and who controls the work process, said Bobby Bollinger, a North Carolina attorney specializing in workers’ compensation law with a client roster in the trucking industry.

The common law test, he said, the same one the IRS uses, considers “whose tools and whose materials are used. Whether the employer is telling the worker how to do the job on a minute-to-minute basis. Whether the worker is paid by the hour or by the job. Whether he’s free to work for someone else.”

Legal challenges have occurred, starting with lawsuits against transportation network companies (TNCs) like Uber and Lyft. Several court cases in recent years have come down on the side of allowing such companies to continue classifying drivers as independent contractors.

Those decisions are significant for TNCs, because the gig model relies on the lower labor cost of independent contractors. Classification as an employee adds at least 30 percent to labor costs.

The issues lie with how a worker is paid and who controls the work process. — Bobby Bollinger, a North Carolina attorney

However, a March 2018 California Supreme Court ruling in a case involving delivery drivers for Dynamex went the other way. The Dynamex decision places heavy emphasis on whether the worker is performing a core function of the business.

Under the Dynamex court’s standard, an electrician called to fix a wiring problem at an Uber office would be considered a general contractor. But a driver providing rides to customers would be part of the company’s central mission and therefore an employee.

Despite the California ruling, a Philadelphia court a month later declined to follow suit, ruling that Uber’s limousine drivers are independent contractors, not employees. So a definitive answer remains elusive.

A Legislative Movement

Misclassification of workers as independent contractors introduces risks to both employers and workers, said Matt Zender, vice president, workers’ compensation product manager, AmTrust.

“My concern is for individuals who believe they’re covered under workers’ compensation, have an injury, try to file a claim and find they’re not covered.”

Misclassifying workers opens a “Pandora’s box” for employers, said Richard R. Meneghello, partner, Fisher Phillips.

Issues include tax liabilities, claims for minimum wage and overtime violations, workers’ comp benefits, civil labor law rights and wrongful termination suits.

The motive for companies seeking the contractor definition is clear: They don’t have to pay for benefits, said Meneghello. “But from a legal perspective, it’s not so easy to turn the workforce into contractors.”

“My concern is for individuals who believe they’re covered under workers’ compensation, have an injury, try to file a claim and find they’re not covered in the eyes of the state.” — Matt Zender, vice president, workers’ compensation product manager, AmTrust

It’s about to get easier, however. In 2016, Handy — which is being sued in five states for misclassification of workers — drafted a N.Y. bill to establish a program where gig-economy companies would pay 2.5 percent of workers’ income into individual health savings accounts, yet would classify them as independent contractors.

Unions and worker advocacy groups argue the program would rob workers of rights and protections. So Handy moved on to eight other states where it would be more likely to win.

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So far, the Handy bills have passed one house of the legislature in Georgia and Colorado; passed both houses in Iowa and Tennessee; and been signed into law in Kentucky, Utah and Indiana. A similar bill was also introduced in Alabama.

The bills’ language says all workers who find jobs through a website or mobile app are independent contractors, as long as the company running the digital platform does not control schedules, prohibit them from working elsewhere and meets other criteria. Two bills exclude transportation network companies such as Uber.

These laws could have far-reaching consequences. Traditional service companies will struggle to compete with start-ups paying minimal labor costs.

Opponents warn that the Handy bills are so broad that a service company need only launch an app for customers to contract services, and they’d be free to re-classify their employees as independent contractors — leaving workers without social security, health insurance or the protections of unemployment insurance or workers’ comp.

That could destabilize social safety nets as well as shrink available workers’ comp premiums.

A New Classification

Independent contractors need to buy their own insurance, including workers’ compensation. But many don’t, said Hart Brown, executive vice president, COO, Firestorm. They may not realize that in the case of an accident, their personal car and health insurance won’t engage, Brown said.

Matt Zender, vice president, workers’ compensation product manager, AmTrust

Workers’ compensation for gig workers can be hard to find. Some state-sponsored funds provide self-employed contractors’ coverage.  Policies can be expensive though in some high-risk occupations, such as roofing, said Bollinger.

The gig system, where a worker does several different jobs for several different companies, breaks down without portable benefits, said Brown. Portable benefits would follow workers from one workplace engagement to another.

What a portable benefits program would look like is unclear, he said, but some combination of employers, independent contractors and intermediaries (such as a digital platform business or staffing agency) would contribute to the program based on a percentage of each transaction.

There is movement toward portable benefits legislation. The Aspen Institute proposed portable benefits where companies contribute to workers’ benefits based on how much an employee works for them. Uber and SEI together proposed a portable benefits bill to the Washington State Legislature.

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Senator Mark Warner (D. VA) introduced the Portable Benefits for Independent Workers Pilot Program Act for the study of portable benefits, and Congresswoman Suzan DelBene (D. WA) introduced a House companion bill.

Meneghello is skeptical of portable benefits as a long-term solution. “They’re a good first step,” he said, “but they paper over the problem. We need a new category of workers.”

A portable benefits model would open opportunities for the growing Insurtech market. Brad Smith, CEO, Intuit, estimates the gig economy to be about 34 percent of the workforce in 2018, growing to 43 percent by 2020.

The insurance industry reinvented itself from a risk transfer mechanism to a risk management mechanism, Brown said, and now it’s reinventing itself again as risk educator to a new hybrid market. &

Susannah Levine writes about health care, education and technology. She can be reached at [email protected] Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]