The Law

Legal Spotlight

A look at the latest court decisions impacting the insurance industry.
By: | January 10, 2018 • 5 min read

No Bone for Dog Groomer

Woofbeach, a dog grooming facility in Illinois, was not pleased to see Beach for Dogs pop up in the greater Chicago area. It was particularly upset when Beach for Dogs installed a sign in front of its door, displaying a dog on a beach with a palm tree.

For Woofbeach, the sign was eerily similar to its own; the company sued for trademark infringement.

A former Woofbeach customer and the Beach for Dogs founder, Steven Holland, stole elements from Woofbeach’s logo without authorization and created his own business with similar goals, alleged Woofbeach.

The suit further claimed that the Beach for Dogs logo construction confused customers into assuming affiliation between the two businesses.

To address its legal fees, Beach for Dogs turned to Sentinel Insurance Co. for defense coverage, but Sentinel refused.

The liability policy Beach for Dogs obtained from Sentinel contained a broad intellectual property (IP) exclusion that barred coverage for any claims arising out of alleged infringement, such as copyright or trademark, said Sentinel.

The insurer sought a ruling to confirm its position in the Woofbeach suit.

However, Beach for Dogs argued the policy also held a limited exception to the IP exclusion when a suit alleges only that a policyholder infringed on another’s copyright, slogan or its title in its advertising.

Therefore, the groomer argued, the limited exception on advertising should restore coverage from the insurer.

Sentinel countered that Beach for Dogs was attempting to rewrite the Woofbeach complaint, “arguing that there are allegations of copyright infringement,” yet “there are no factual allegations of copyright infringement in the Woofbeach suit.”


The suit, instead, was specific to trademark infringement and unfair competition due to the similarities in business type and signage.

Additionally, the suit was not about advertising; it was about stealing the logo design. Sentinel argued that the term advertising referred to a wide distribution of the logo, but Woofbeach was suing specifically over the sign above Beach for Dogs’ door.

“By the express language of the IP exclusion, the existence of the trademark allegations precludes coverage for the entire underlying lawsuit,” said the judge.

Scorecard: Sentinel Insurance Co. need not defend Beach for Dogs in the trademark infringement and unfair competition suit filed by Woofbeach.

Takeaway: In the tricky world of copyright, trademark and advertising, best practice is to determine the line drawn between each. Know where subsidiary categories fall and outline what is and is not covered.

Data Leak Wasn’t ‘Published’

Software developer Innovak International Inc. was the target of a data breach.

Innovak designs, develops and sells software systems to schools across the U.S. The breach leaked personal private information, including social security numbers, addresses, employment and spousal information.

Several individuals affected by the breach filed a putative class action suit, claiming that Innovak failed to adequately protect their information, along with failing to disclose the breach in a timely manner.

They also claimed to suffer “psychic injuries,” including stress, nuisance, loss of sleep and worry.

Innovak informed its insurer, The Hanover Insurance Company, of the impending class action, asking for defense coverage under a personal and advertising injury claims policy.

Hanover reviewed its injury claims policy and noted that the insurer had “no duty to defend the insured against any ‘suit’ seeking damages for ‘personal and advertising injury’ to which this insurance does not apply.”

The policy further defined a ‘personal and advertising injury’ as a bodily (including mental) injury stemming from oral or written publication, in any manner, that violated a person’s right of privacy.

Hanover notified Innovak it would not cover costs for defense, because Innovak did not publish the material leaked in the breach. Instead, negligence led to the loss of information.

The court reviewed the underlying class action before turning to the policy. The class action alleged gross negligence, recklessness and/or wantonness against Innovak for its “failure to provide adequate security to protect their PPI.”


The underlying action never alleged that Innovak published the stolen material. This, said the court, excused Hanover from covering the underlying class action, because it was explicitly excluded in its personal and advertising injury claims policy.

Scorecard: When reviewing the underlying class action, the court deemed that the claimants never alleged Innovak published their information. Hanover does not have to cover the defense.

Takeaway: Defense or indemnification coverage can be affected by the allegations included or omitted in an underlying claim. It would be wise to review the wording in any underlying suit before heading to court.

Insurer Liable for $9 Million

A Wisconsin trucking company, Rogers Cartage Co., hauls bulk liquid chemicals across the country. It was hit with two environmental contamination lawsuits over its alleged practices at a former truck cleaning facility.

Rogers settled both suits for nearly $9 million. It sought indemnification for the settlements through its insurer, however, the trucking company ran into a slight problem: The contamination happened in the early 1960s.

Travelers Indemnity Co. wrote a general liability policy for Rogers between 1960 and 1961 and another from 1965 to 1986 — with written documentation to back up the coverage — yet both the insurer and the trucking company could not find a policy written for 1961 to 1965.

Travelers did not believe it needed to cover indemnification for the lawsuits. It said there was a lack of evidence of its coverage at that time.

During the court hearing, Rogers argued that the bookend policies clearly showed it had been covered by Travelers during the 1960s, meaning the insurer should provide legal coverage for the underlying suits.

Travelers countered that, because both the insured and its own records did not have proof of coverage, then it likely did not cover Rogers during the period in which it was facing environmental contamination suits.

Rogers came back with copies of the policies it possessed, examples of Travelers policy paperwork from the time period in question, a certificate of insurance from 1962 and a letter from a Travelers claims adjuster referencing renewal numbers on the bookend policies.


“Travelers has not offered any affirmative evidence to rebut, undercut or discount Rogers’s evidence that the disputed policies contained the same coverage and endorsements as the bookend policies and specimen policies,” said the judge.

The court ruled in favor of Rogers.

Scorecard: Despite being unable to procure a written policy, Travelers is on the hook to pay $9 million in indemnification.

Takeaway: Accurate and precise documentation will lead to positive results on the insurer’s side. Lack of documents leaves too many open doors for a court to second guess.

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

More from Risk & Insurance

More from Risk & Insurance

Risk Focus: Cyber

Expanding Cyber BI

Cyber business interruption insurance is a thriving market, but growth carries the threat of a mega-loss. 
By: | March 5, 2018 • 7 min read

Lingering hopes that large-scale cyber attack might be a once-in-a-lifetime event were dashed last year. The four-day WannaCry ransomware strike in May across 150 countries targeted more than 300,000 computers running Microsoft Windows. A month later, NotPetya hit multinationals ranging from Danish shipping firm Maersk to pharmaceutical giant Merck.


Maersk’s chairman, Jim Hagemann Snabe, revealed at this year’s Davos summit that NotPetya shut down most of the group’s network. While it was replacing 45,000 PCs and 4,000 servers, freight transactions had to be completed manually. The combined cost of business interruption and rebuilding the system was up to $300 million.

Merck’s CFO Robert Davis told investors that its NotPetya bill included $135 million in lost sales plus $175 million in additional costs. Fellow victims FedEx and French construction group Saint Gobain reported similar financial hits from lost business and clean-up costs.

The fast-expanding world of cryptocurrencies is also increasingly targeted. Echoes of the 2014 hack that triggered the collapse of Bitcoin exchange Mt. Gox emerged this January when Japanese cryptocurrency exchange Coincheck pledged to repay customers $500 million stolen by hackers in a cyber heist.

The size and scope of last summer’s attacks accelerated discussions on both sides of the Atlantic, between risk managers and brokers seeking more comprehensive cyber business interruption insurance products.

It also recently persuaded Pool Re, the UK’s terrorism reinsurance pool set up 25 years ago after bomb attacks in London’s financial quarter, to announce that from April its cover will extend to include material damage and direct BI resulting from acts of terrorism using a cyber trigger.

“The threat from a cyber attack is evident, and businesses have become increasingly concerned about the extensive repercussions these types of attacks could have on them,” said Pool Re’s chief, Julian Enoizi. “This was a clear gap in our coverage which left businesses potentially exposed.”

Shifting Focus

Development of cyber BI insurance to date reveals something of a transatlantic divide, said Hans Allnutt, head of cyber and data risk at international law firm DAC Beachcroft. The first U.S. mainstream cyber insurance products were a response to California’s data security and breach notification legislation in 2003.

Jimaan Sané, technology underwriter, Beazley

Of more recent vintage, Europe’s first cyber policies’ wordings initially reflected U.S. wordings, with the focus on data breaches. “So underwriters had to innovate and push hard on other areas of cyber cover, particularly BI and cyber crimes such as ransomware demands and distributed denial of service attacks,” said Allnut.

“Europe now has regulation coming up this May in the form of the General Data Protection Regulation across the EU, so the focus has essentially come full circle.”

Cyber insurance policies also provide a degree of cover for BI resulting from one of three main triggers, said Jimaan Sané, technology underwriter for specialist insurer Beazley. “First is the malicious-type trigger, where the system goes down or an outage results directly from a hack.

“Second is any incident involving negligence — the so-called ‘fat finger’ — where human or operational error causes a loss or there has been failure to upgrade or maintain the system. Third is any broader unplanned outage that hits either the company or anyone on which it relies, such as a service provider.”

The importance of cyber BI covering negligent acts in addition to phishing and social engineering attacks was underlined by last May’s IT meltdown suffered by airline BA.

This was triggered by a technician who switched off and then reconnected the power supply to BA’s data center, physically damaging servers and distribution panels.

Compensating delayed passengers cost the company around $80 million, although the bill fell short of the $461 million operational error loss suffered by Knight Capital in 2012, which pushed it close to bankruptcy and decimated its share price.

Mistaken Assumption

Awareness of potentially huge BI losses resulting from cyber attack was heightened by well-publicized hacks suffered by retailers such as Target and Home Depot in late 2013 and 2014, said Matt Kletzli, SVP and head of management liability at Victor O. Schinnerer & Company.


However, the incidents didn’t initially alarm smaller, less high-profile businesses, which assumed they wouldn’t be similarly targeted.

“But perpetrators employing bots and ransomware set out to expose any firms with weaknesses in their system,” he added.

“Suddenly, smaller firms found that even when they weren’t themselves targeted, many of those around them had fallen victim to attacks. Awareness started to lift, as the focus moved from large, headline-grabbing attacks to more everyday incidents.”

Publications such as the Director’s Handbook of Cyber-Risk Oversight, issued by the National Association of Corporate Directors and the Internet Security Alliance fixed the issue firmly on boardroom agendas.

“What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.” — Jimaan Sané, technology underwriter, Beazley

Reformed ex-hackers were recruited to offer board members their insights into the most vulnerable points across the company’s systems — in much the same way as forger-turned-security-expert Frank Abagnale Jr., subject of the Spielberg biopic “Catch Me If You Can.”

There also has been an increasing focus on systemic risk related to cyber attacks. Allnutt cites “Business Blackout,” a July 2015 study by Lloyd’s of London and the Cambridge University’s Centre for Risk Studies.

This detailed analysis of what could result from a major cyber attack on America’s power grid predicted a cost to the U.S. economy of hundreds of billions and claims to the insurance industry totalling upwards of $21.4 billion.

Lloyd’s described the scenario as both “technologically possible” and “improbable.” Three years on, however, it appears less fanciful.

In January, the head of the UK’s National Cyber Security Centre, Ciaran Martin, said the UK had been fortunate in so far averting a ‘category one’ attack. A C1 would shut down the financial services sector on which the country relies heavily and other vital infrastructure. It was a case of “when, not if” such an assault would be launched, he warned.

AI: Friend or Foe?

Despite daunting potential financial losses, pioneers of cyber BI insurance such as Beazley, Zurich, AIG and Chubb now see new competitors in the market. Capacity is growing steadily, said Allnutt.

“Not only is cyber insurance a new product, it also offers a new source of premium revenue so there is considerable appetite for taking it on,” he added. “However, whilst most insurers are comfortable with the liability aspects of cyber risk; not all insurers are covering loss of income.”

Matt Kletzli, SVP and head of management liability, Victor O. Schinnerer & Company

Kletzli added that available products include several well-written, broad cyber coverages that take into account all types of potential cyber attack and don’t attempt to limit cover by applying a narrow definition of BI loss.

“It’s a rapidly-evolving coverage — and needs to be — in order to keep up with changing circumstances,” he said.

The good news, according to a Fitch report, is that the cyber loss ratio has been reduced to 45 percent as more companies buy cover and the market continues to expand, bringing down the size of the average loss.

“The bad news is that at cyber events, talk is regularly turning to ‘what will be the Hurricane Katrina-type event’ for the cyber market?” said Kletzli.

“What’s worse is that with hurricane losses, underwriters know which regions are most at risk, whereas cyber is a global risk and insurers potentially face huge aggregation.”


Nor is the advent of robotics and artificial intelligence (AI) necessarily cause for optimism. As Allnutt noted, while AI can potentially be used to decode malware, by the same token sophisticated criminals can employ it to develop new malware and escalate the ‘computer versus computer’ battle.

“The trend towards greater automation of business means that we can expect more incidents involving loss of income,” said Sané. “What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.

“We’re likely to see a growing number of attacks where the aim is to cause disruption, rather than demand a ransom.

“The paradox of cyber BI is that the more sophisticated your organization and the more it embraces automation, the bigger the potential impact when an outage does occur. Those old-fashioned businesses still reliant on traditional processes generally aren’t affected as much and incur smaller losses.” &

Graham Buck is editor of He can be reached at