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

High Net Worth

High Net Worth Clients Live in CAT Zones. Here’s What Their Resiliency Plan Should Include

Having a resiliency plan and practicing it can make all the difference in a disaster.
By: | September 14, 2018 • 7 min read

Packed with state-of-the-art electronics, priceless collections and high-end furnishings, and situated in scenic, often remote locations, the dwellings of high net worth individuals and families pose particular challenges when it comes to disaster resiliency. But help is on the way.

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Armed with loss data, innovative new programs, technological advances, and a growing army of niche service-providers aimed at addressing an astonishingly diverse set of risks, insurers are increasingly determined to not just insure against their high net worth clients’ losses, but to prevent them.

Insurers have long been proactive in risk mitigation, but increasingly, after the recent surge in wildfire and storm losses, insureds are now, too.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy,” said Laura Sherman, founding partner at Baldwin Krystyn Sherman Partners.

And especially in the high net worth space, preventing that loss is vastly preferable to a payout, for insurers and insureds alike.

“If insurers can preserve even one house that’s 10 or 20 or 40 million dollars … whatever they have spent in a year is money well spent. Plus they’ve saved this important asset for the client,” said Bruce Gendelman, chairman and founder Bruce Gendelman Insurance Services.

High Net Worth Vulnerabilities

Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

As the number and size of luxury homes built in vulnerable areas has increased, so has the frequency and magnitude of extreme weather events, including hurricanes, harsh cold and winter storms, and wildfires.

“There is a growing desire to inhabit this riskier terrain,” said Jason Metzger, SVP Risk Management, PURE group of insurance companies. “In the western states alone, a little over a million homes are highly vulnerable to wildfires because of their proximity to forests that are fuller of fuel than they have been in years past.”

Such homes are often filled with expensive artwork and collections, from fine wine to rare books to couture to automobiles, each presenting unique challenges. The homes themselves present other vulnerabilities.

“Larger, more sophisticated homes are bristling with more technology than ever,” said Stephen Poux, SVP and head of Risk Management Services and Loss Prevention for AIG’s Private Client Group.

“A lightning strike can trash every electronic in the home.”

Niche Service Providers

A variety of niche service providers are stepping forward to help.

Secure facilities provide hurricane-proof, wildfire-proof off-site storage for artwork, antiques, and all manner of collectibles for seasonal or rotating storage, as well as ahead of impending disasters.

Other companies help manage such collections — a substantial challenge anytime, but especially during a crisis.

“Knowing where it is, is a huge part of mitigating the risk,” said Eric Kahan, founder of Collector Systems, a cloud-based collection management company that allows collectors to monitor their collections during loans to museums, transit between homes, or evacuation to secure storage.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy.” — Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

Insurers also employ specialists in-house. AIG employs four art curators who advise clients on how to protect and preserve their art collections.

Perhaps the best known and most striking example of this kind of direct insurer involvement are the fire teams insurers retain or employ to monitor fires and even spray retardant or water on threatened properties.

High-Level Service for High Net Worth

All high net worth carriers have programs that leverage expertise, loss data, and relationships with vendors to help clients avoid and recover from losses, employing the highest levels of customer service to accomplish this as unobtrusively as possible.

“What allows you to do your job best is when you develop that relationship with a client, where it’s the same people that are interacting with them on every front for their risk management,” said Steve Bitterman, chief risk services officer for Vault Insurance.

Site visits are an essential first step, allowing insurers to assess risks, make recommendations to reduce them, and establish plans in the event of a disaster.

“When you’re in a catastrophic situation, it’s high stress, time is of the essence, and people forget things,” said Sherman. “Having a written plan in place is paramount to success.”

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Another important component is knowing who will execute that plan in homes that are often unoccupied.

Domestic staff may lack the knowledge or authority to protect the homeowner’s assets, and during a disaster may be distracted dealing with threats to their own homes and families. Adequate planning includes ensuring that whoever is responsible has the training and authority to execute the plan.

Evaluating New Technology

Insurers use technologies like GPS and satellite imagery to determine which homes are directly threatened by storms or wildfires. They also assess and vet technologies that can be implemented by homeowners, from impact glass to alarm and monitoring systems, to more obscure but potentially more important options.

AIG’s Poux recommends two types of vents that mitigate important, and unexpected risks.

“There’s a fantastic technology called Smart Vent, which allows water to flow in and out of the foundation,” Poux said. “… The weight of water outside a foundation can push a foundation wall in. If you equalize that water inside and out at the same level, you negate that.”

Another wildfire risk — embers getting sucked into the attic — is, according to Poux, “typically the greatest cause of the destruction of homes.” But, he said, “Special ember-resisting venting, like Brandguard Vents, can remove that exposure altogether.”

Building Smart

Many disaster resiliency technologies can be applied at any time, but often the cost is fractional if implemented during initial construction. AIG’s Smart Build is a free program for new or remodeled homes that evolved out of AIG’s construction insurance programs.

Previously available only to homes valued at $5 million and up, Smart Build recently expanded to include homes of $1 million and up. Roughly 100 homes are enrolled, with an average value of $13 million.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work.” — Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“We know what goes wrong in high net worth homes,” said Poux, citing AIG’s decades of loss data.

“We’re incenting our client and by proxy their builder, their architects and their broker, to give us a seat at the design table. … That enables us to help tweak the architectural plans in ways that are very easy to do with a pencil, as opposed to after a home is built.”

Poux cites a remote ranch property in Texas.

Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“The client was rebuilding a home but also installing new roads and grading and driveways. … The property was very far from the fire department and there wasn’t any available water on the property.”

Poux’s team was able to recommend underground water storage tanks, something that would have been prohibitively expensive after construction.

“But if the ground is open and you’ve got heavy equipment, it’s a relatively minor additional expense.”

Homes that graduate from the Smart Build program may be eligible for preferred pricing due to their added resilience, Poux said.

Recovery from Loss

A major component of disaster resiliency is still recovery from loss, and preparation is key to the prompt service expected by homeowners paying six- or seven-figure premiums.

Before Irma, PURE sent contact information for pre-assigned claim adjusters to insureds in the storm’s direct path.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work,” said Curt Goetsch, head of underwriting for Ironshore’s Private Client Group.

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“If you’ve got custom construction or imported materials in your house, you’re not going to go down the street and just find somebody that can do that kind of work, or has those materials in stock.”

In the wake of disaster, even basic services can be scarce.

“Our claims and risk management departments have to work together in advance of the storm,” said Bitterman, “to have contractors and restoration companies and tarp and board services that are going to respond to our company’s clients, that will commit resources to us.”

And while local agents’ connections can be invaluable, Goetsch sees insurers taking more of that responsibility from the agent, to at least get the claim started.

“When there is a disaster, the agency’s staff may have to deal with personal losses,” Goetsch said. &

Jon McGoran is a novelist and magazine editor based outside of Philadelphia. He can be reached at [email protected]