The Law

Legal Spotlight

A look at the latest court decisions impacting the insurance industry.
By: | November 1, 2017 • 5 min read

Batteries Included: Insurer Must Pay for Pollution Damages

Between 1982 and 2009, exide technologies inc. rented property from The Wattles Co. to operate its battery manufacturing facility. After the tenants left, Wattles sued Exide for roofing and floor damages caused by sulfuric acid fumes and acid leaks released during the manufacturing process.

As of June 2016, Wattles was awarded $1.4 million in damages and more than $860,000 in attorneys’ fees.

Exide turned to its insurer, Ace American Insurance Co., for coverage. Ace, however, claimed it had no duty to pay the claim. According to the insurer, Exide had proposed a pollution exclusion for the policy, but it was omitted from the final policy by mistake.

Both parties agreed the exclusion was intended, argued Ace. In addition, the damages done to Wattles’ roof and floor fell under exclusions for general wear-and-tear — a by product of Exide’s battery operations.

The Georgia federal court was unconvinced.

“The problem with Ace’s reformation claim is that, at best, Ace has produced evidence that the parties to the Ace policy may have intended for it to include a pollution exclusion, but no evidence that they actually did so intend,” the judge said.

“The fact that Exide’s contamination of the premises — i.e., its pollution of the building — was an insured risk is dispositive.”

He found Ace was not only liable for the entire loss exceeding a $2 million deductible up to Exide’s $60 million policy limit, but Ace was also liable for losses stemming from Exide’s defense of Wattles’ underlying suit.


That amount, the judge determined, was still unclear, and he directed the parties to submit supplementary evidence concerning Exide’s defense costs moving forward.

Scorecard: Ace American Insurance Co. can’t rely on an alleged policy error to deny coverage of pollution damages.

Takeaway: The adage “It’s the thought that counts” will not hold in court. A policy and its exclusions require explicit and detailed language.

Secondary Damages Not Excluded

Superstorm sandy hit the atlantic coast in 2012, bringing with it wind, storm surge and flood damage claims. In New York, property owner 7001 East 71st St. LLC returned after the storm to a single-story shopping center, where the owner found flooding and damages to the building’s roof, ceiling and walls.

7001 East held a $3 million policy with Chubb Custom Insurance Co. and a $5 million policy with Continental Casualty Co. Repair estimates reached more than $14 million.

The property owner filed claims with both insurers for property damage and lost profits. The damages, 7001 East claimed, allowed for rainwater to enter the building through holes in the roof created by Sandy’s severe winds. Chubb and Continental both denied coverage, pointing to flood exclusions in each policy.

In two separate hearings, 7001 East took the insurers to court.

The court looked at the damages done, finding flood and rainwater intrusion through the roof as the main two causes.

In Chubb’s case: “These are separate and distinct losses caused by separate and distinct physical forces,” said the court judge.

“Because a jury could find that rainwater and flooding caused damage to distinct parts of the shopping center, the policies’ exclusions for flooding do not bar coverage for the parts of the shopping center damaged by rainwater.”

The judge ruled that the water damages only extended from the holes in the roof, which were caused by wind. Therefore, Chubb was responsible for coverage, because its policy did not exclude wind damage.

Continental, however, had a wind exclusion in its policy and was not liable for the damages.

Scorecard: Chubb’s policy contained a covered hazard — wind — which left the insurer responsible for flood damages. Continental’s policy excluded both flood and wind, allowing the insurer to walk away.

Takeaway: Courts will take into account whether or not excluded damages are a direct result of a covered hazard. In such cases, the court looks to the primary cause of damages to determine coverage.

Insurer Not Responsible for Intentional Fraud

The owner of a hair salon in a Florida strip mall felt cheated. The tenant believed the mall owner, JG Gulf Coast Town Center, LLC, and the real estate manager, CBL & Associates Properties, fraudulently inflated the tenant’s utility rates. Its energy bills went from $500 per month to almost $700.

A class action suit was brought against the owner and manager.

CBL and Gulf sought insurance coverage for the underlying action from its insurer, Catlin Specialty Insurance Co.

The insurer argued that, in its policy, it did not cover claims where a client intentionally and knowingly committed wrongful acts. Catlin had no legal obligation to pay any defense costs or damages incurred, according to the insurer.

CBL and Gulf argued they were entitled to insurance coverage because the underlying action involved alleged “negligent acts, errors or omissions in the rendering of professional services” — something explicitly covered by Catlin’s policy. Each asked for declaratory judgment.


This policy clause came in to question. The court determined an action, error or omission must be negligent in conduct in order for the policy to apply, and because CBL and Gulf were not negligent in their actions but instead intentional, Catlin did not have to pay for the underlying suit.

“Because the only reasonable interpretation of the allegations in the underlying action sound in intentional conduct, and the policy does not cover such acts, Catlin’s motion for judgment on the pleadings is granted and CBL defendants’ motion for judgment on the pleadings is denied,” said the court judge.

Scorecard: Catlin Specialty Insurance Co. does not have to cover the mall owner for a fraud suit.

Takeaway: Businesses must have a plan in place to minimize the risk of employees engaging in fraudulent activities. Insurers typically exclude coverage for such illegal actions.

Autumn Heisler is a staff writer at Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance


Insurers Take to the Skies

This year’s hurricane season sees the use of drones and other aerial intelligence gathering systems as insurers seek to estimate claims costs.
By: | November 1, 2017 • 6 min read

For Southern communities, current recovery efforts in the wake of Hurricane Harvey will recall the painful devastation of 2005, when Katrina and Wilma struck. But those who look skyward will notice one conspicuous difference this time around: drones.


Much has changed since Katrina and Wilma, both economically and technologically. The insurance industry evolved as well. Drones and other visual intelligence systems (VIS) are set to play an increasing role in loss assessment, claims handling and underwriting.

Farmers Insurance, which announced in August it launched a fleet of drones to enhance weather-related property damage claim assessment, confirmed it deployed its fleet in the aftermath of Harvey.

“The pent-up demand for drones, particularly from a claims-processing standpoint, has been accumulating for almost two years now,” said George Mathew, CEO of Kespry, Farmers’ drone and aerial intelligence platform provider partner.

“The current wind and hail damage season that we are entering is when many of the insurance carriers are switching from proof of concept work to full production rollout.”

 According to Mathew, Farmers’ fleet focused on wind damage in and around Corpus Christi, Texas, at the time of this writing. “Additional work is already underway in the greater Houston area and will expand in the coming weeks and months,” he added.

No doubt other carriers have fleets in the air. AIG, for example, occupied the forefront of VIS since winning its drone operation license in 2015. It deployed drones to inspections sites in the U.S. and abroad, including stadiums, hotels, office buildings, private homes, construction sites and energy plants.

Claims Response

At present, insurers are primarily using VIS for CAT loss assessment. After a catastrophe, access is often prohibited or impossible. Drones allow access for assessing damage over potentially vast areas in a more cost-effective and time-sensitive manner than sending human inspectors with clipboards and cameras.

“Drones improve risk analysis by providing a more efficient alternative to capturing aerial photos from a sky-view. They allow insurers to rapidly assess the scope of damages and provide access that may not otherwise be available,” explained Chris Luck, national practice leader of Advocacy at JLT Specialty USA.

“The pent-up demand for drones, particularly from a claims-processing standpoint, has been accumulating for almost two years now.” — George Mathew, CEO, Kespry

“In our experience, competitive advantage is gained mostly by claims departments and third-party administrators. Having the capability to provide exact measurements and details from photos taken by drones allows insurers to expedite the claim processing time,” he added.

Indeed, as tech becomes more disruptive, insurers will increasingly seek to take advantage of VIS technologies to help them provide faster, more accurate and more efficient insurance solutions.

Duncan Ellis, U.S. property practice leader, Marsh

One way Farmers is differentiating its drone program is by employing its own FAA-licensed drone operators, who are also Farmers-trained claim representatives.

Keith Daly, E.V.P. and chief claims officer for Farmers Insurance, said when launching the program that this sets Farmers apart from most carriers, who typically engage third-party drone pilots to conduct evaluations.

“In the end, it’s all about the experience for the policyholder who has their claim adjudicated in the most expeditious manner possible,” said Mathew.

“The technology should simply work and just melt away into the background. That’s why we don’t just focus on building an industrial-grade drone, but a complete aerial intelligence platform for — in this case — claims management.”

Insurance Applications

Duncan Ellis, U.S. property practice leader at Marsh, believes that, while currently employed primarily to assess catastrophic damage, VIS will increasingly be employed to inspect standard property damage claims.

However, he admitted that at this stage they are better at identifying binary factors such as the area affected by a peril rather than complex assessments, since VIS cannot look inside structures nor assess their structural integrity.

“If a chemical plant suffers an explosion, it might be difficult to say whether the plant is fully or partially out of operation, for example, which would affect a business interruption claim dramatically.


“But for simpler assessments, such as identifying how many houses or industrial units have been destroyed by a tornado, or how many rental cars in a lot have suffered hail damage from a storm, a VIS drone could do this easily, and the insurer can calculate its estimated losses from there,” he said.

In addition,VIS possess powerful applications for pre-loss risk assessment and underwriting. The high-end drones used by insurers can capture not just visual images, but mapping heat, moisture or 3D topography, among other variables.

This has clear applications in the assessment and completion of claims, but also in potentially mitigating risk before an event happens, and pricing insurance accordingly.

“VIS and drones will play an increasing underwriting support role as they can help underwriters get a better idea of the risk — a picture tells a thousand words and is so much better than a report,” said Ellis.

VIS images allow underwriters to see risks in real time, and to visually spot risk factors that could get overlooked using traditional checks or even mature visual technologies like satellites. For example, VIS could map thermal hotspots that could signal danger or poor maintenance at a chemical plant.

Chris Luck, national practice leader of Advocacy, JLT Specialty USA

“Risk and underwriting are very natural adjacencies, especially when high risk/high value policies are being underwritten,” said Mathew.

“We are in a transformational moment in insurance where claims processing, risk management and underwriting can be reimagined with entirely new sources of data. The drone just happens to be one of most compelling of those sources.”

Ellis added that drones also could be employed to monitor supplies in the marine, agriculture or oil sectors, for example, to ensure shipments, inventories and supply chains are running uninterrupted.

“However, we’re still mainly seeing insurers using VIS drones for loss assessment and estimates, and it’s not even clear how extensively they are using drones for that purpose at this point,” he noted.

“Insurers are experimenting with this technology, but given that some of the laws around drone use are still developing and restrictions are often placed on using drones [after] a CAT event, the extent to which VIS is being used is not made overly public.”

Drone inspections could raise liability risks of their own, particularly if undertaken in busy spaces in which they could cause human injury.

Privacy issues also are a potential stumbling block, so insurers are dipping their toes into the water carefully.

Risk Improvement

There is no doubt, however, that VIS use will increase among insurers.


“Although our clients do not have tremendous experience utilizing drones, this technology is beneficial in many ways, from providing security monitoring of their perimeter to loss control inspections of areas that would otherwise require more costly inspections using heavy equipment or climbers,” said Luck.

In other words, drones could help insurance buyers spot weaknesses, mitigate risk and ultimately win more favorable coverage from their insurers.

“Some risks will see pricing and coverage improvements because the information and data provided by drones will put underwriters at ease and reduce uncertainty,” said Ellis.

The flip-side, he noted, is that there will be fewer places to hide for companies with poor risk management that may have been benefiting from underwriters not being able to access the full picture.

Either way, drones will increasingly help insurers differentiate good risks from bad. In time, they may also help insurance buyers differentiate between carriers, too. &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected]