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The Law

Legal Spotlight

A look at the latest court decisions impacting the insurance industry.
By: | October 12, 2017 • 4 min read

Trailer Not a Warehouse

A temporary storage trailer was stolen from LaptopPlaza in December 2013. Approximately $711,000 worth of goods were inside.

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The company held a warehouse insurance policy through Starr Indemnity & Liability Co. and brought the case before the insurer. Starr, however did not believe its policy should cover a temporary trailer, because it was not technically a warehouse.

LaptopPlaza argued that the trailer was a temporary solution while it renovated its Miami-based warehouse. The trailer, therefore, was being used in a warehousing capacity, argued the company.

Starr followed Black’s Law Dictionary’s definition: a warehouse is a “building used to store goods and other items.” LaptopPlaza argued that Merriam-Webster’s Collegiate Dictionary defined warehouse as a “structure or room for the storage of merchandise.”

The Second Circuit court of New York said, “The trailer fits neither definition. It is not a building. Nor does it fit the latter definition, as a trailer is designed for the transportation, and not the storage, of merchandise.

“LaptopPlaza has offered no persuasive argument that the trailer in this case … should be considered a ‘warehouse,’ ” it continued.

In its appeals brief, LaptopPlaza explained how the company recently updated its policy with Starr in November 2013, because it moved locations. The warehouse coverage was modified during this change, said LaptopPlaza. It pointed to a policy clause covering property that was not within the warehouse but was warehoused elsewhere — off premises. The court, however, said this clause did not apply; the trailer was on the premises.

The court determined the stolen goods were not covered under property damage insurance; the definition of warehouse did not apply to the trailer.

Scorecard: Starr is not responsible for the loss of the stolen merchandise. The trailer was not defined as a warehouse under the insurance policy.

Takeaway: When taking measures outside of normal business operations, get clear advice on how it might impact coverage.

Tornado Damages Partially Covered

A building was destroyed by a 2010 tornado. Olga Despotis Trust, the building’s owner, held a policy with Cincinnati Insurance Company. In February 2011, the Trust claimed the loss of the building, valuing the actual cash value (ACV) at $1.4 million. CIC determined that the ACV of the building was $800,000, and issued a check for that amount. The Trust insisted the additional funds were due.

In April 2011, a court-ordered appraiser determined that the total amount of replacement cost equaled $1.5 million, with the lost rent income at $94,000. The ACV of the building was estimated at slightly more than $1 million.

CIC paid the ACV but did not pay the replacement cost value, believing it didn’t need to pay for replacement costs. In its policy, CIC required damaged properties to begin renovation within two years of the date of loss. By 2015, the Trust had not begun to rebuild.

The Trust argued, however, that waiting for the appraisal value delayed renovation. The two parties filed cross-motions for summary judgment.

“The Trust cannot maintain a claim for breach of contract based upon a payment that occurred in March 2011, prior to when the parties fully engaged in the appraisal process provided for in the Policy,” said the district court.

In the 2017 appeal, the Eighth Circuit panel solidified the court’s ruling.

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“The court was unpersuaded by the trust’s argument that CIC’s undervaluation of the ACV prevented the trust from rebuilding or that the additional $256,000 ACV would have caused the trust to start the rebuilding process,” the panel said, concluding that CIC did not have to pay the remaining balance.

Scorecard: Cincinnati Insurance Company is off the hook for additional replacement cost fees.

Takeaway: If a policy requires action on the insured’s part and the insured does not abide by the written policy, then insurers are likely to gain the legal advantage.

Sublimit Does Not Apply to Flood Loss

In October 2012, superstorm sandy wreaked havoc on the eastern coast of the United States. New Jersey Transit suffered extensive damage to its tracks, bridges, tunnels and power stations, which it immediately reported.

NJ Transit sought $400 million in coverage for windstorm damage, but its excess insurers claimed the damage was caused by flooding and invoked a $100 million flood damage sublimit.

NJ Transit took underwriters from the seven excess insurance carriers — including Lloyd’s of London, Ironshore Specialty Insurance Co. and Torus Specialty Insurance Co. — to court. The transit service argued that the water damage came from a “named windstorm” and not from storm surge, as the defendants alleged.

The excess insurers defined storm surge as a “surge of water,” which fell under the policies’ definition of flood.

The judge was not convinced: “Here there is no real dispute that New Jersey Transit’s water damages were caused by Superstorm Sandy … a named windstorm,” the judge said.

“Thus, this court finds that the flood sublimits in New Jersey Transit’s policies do not apply.”

Scorecard: A $100 million sublimit for flood losses does not apply to NJ Transit’s claim for coverage of Superstorm Sandy damage. Excess insurers will be responsible for covering windstorm damage.

Takeaway: A surge of surface water may be considered flood, but where that surge is caused by another independent peril, such as a named windstorm, then a flood sublimit will not apply.

Autumn Heisler is digital producer and 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]