The Law

Legal Spotlight

A look at the latest court decisions impacting the insurance industry.
By: | May 1, 2018 • 6 min read

Theft Not Fully Covered Under Policy

Employee theft is a leading form of fraud that is often overlooked. Wescott Electric Company found that out the hard way.

Over the course of 10 years, from 2003 to 2013, a single employee at Wescott was able to steal nearly $3 million before getting caught. In the last year of theft, the employee stole $700,000 worth of copper wire, selling it for scrap.

During the time of the theft, Wescott had four consecutive insurance policies issued by Cincinnati Insurance Company. When the theft was discovered, Wescott was under the period of the fourth insurance policy, which stated that in order for the policy to take effect, the loss had to be discovered during the policy period.

Policy wording became the crux of the legal debate: Wescott was insured by Cincinnati under four policies; could multiple policies come into play? Cincinnati did not think so. It paid $100,000 — the limit for a single “occurrence” of employee theft under the 2013 policy. It said the previous policies did not apply.

Wescott, however, did not accept this as final. The 2010 policy ended on January 31, 2013; then the 2013 policy kicked in. The employee’s theft was discovered in July 2013. Wescott discovered that $300,000 was stolen between July 2012 and January the next year — falling under the 2010 policy. From January till July 2013, under the 2013 policy, the employee stole roughly the same amount.

Wescott said that in the year leading up to the discovery of theft, $700,000 was stolen. The company believed the theft that occurred under the 2010 policy should be covered by that policy. When Cincinnati refused, Wescott brought a claim for breach of contract against the insurer.

Cincinnati filed a motion to dismiss, arguing the theft was only discovered under the 2013 policy and therefore should only be covered under the 2013 policy.

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The court reviewed and sided with Cincinnati. It agreed with Wescott in that the company was entitled to coverage for a single “occurrence” of employee theft under the 2013 policy. It also determined that the 2010 policy would not apply, because the policy had ended.

When Wescott pushed, the court further stated that “coverage … applies to loss … which is ‘discovered’ by you during the Policy Period — not losses discovered up to one year after the policy period.”

Scorecard: Cincinnati Insurance Company is only responsible for employee theft discovered under the 2013 policy.

Takeaway: When working with a company for multiple policy periods, it is best to review policy wording with clients so that the parameters of the policy are understood.

Insurer Off the Hook for Punitive Damage

Jennifer Zuniga was walking on the sidewalk when a vehicle struck her from behind, injuring her. Zuniga sued the driver, Christopher Medina, for negligence and gross negligence. The court found Medina guilty on both accounts, and Zuniga was awarded $93,250 in damages and $75,000 in punitive damages.

Medina was insured by Farmers Texas County Mutual Insurance Company and so sought coverage under the policy. Noting that Medina was a “covered person,” Farmers agreed to pay damages and gave Zuniga the $93,250 awarded to her. However, Farmers said it was not responsible for the punitive damages and did not pay them.

Farmers filed a petition against Medina and Zuniga for declaratory judgement, seeking a declaration that punitive damages were not included in the policy. They moved that the insurer had “no further duty to defend or indemnify Medina; that Zuniga is not entitled to recover or collect any additional monies from Farmers; and, that Farmers has no further duty with respect to the Final Judgment” in Zuniga’s suit against Medina.

In the interim, Zuniga filed a petition seeking to recover punitive damages from Farmers. Under a turnover order, Zuniga was assigned all of Medina’s rights against Farmers, which led her to asserting additional claims against the insurer.

The trial court denied Farmers’ claims. In review, the court determined that “the punitive damages are covered under the automobile policy in question,” granting Zuniga’s motion. Farmers appealed, arguing that the policy’s plain language, which states that it would “pay damages for bodily injury,” did not cover punitive damages. It further said that even if the policy did cover punitive damages, public policy would bar its policy from covering such damages.

Zuniga argued punitive damages fell into the definition of “damages for bodily injury.” She noted that in similar cases, other courts concluded that the average insured would interpret the term ‘damages’ to include punitive damages.

However, the appellate court reversed the trial court’s decision, stating that Farmers was not responsible for punitive damages.

Scorecard: Farmers Texas Mutual Insurance Company does not have to pay for punitive damages in the underlying Zuniga v. Medina case.

Takeaway: In order to avoid lengthy court battles, insurers should clearly define what is and is not covered under their policies, especially if covered items could be split into subcategories.

Insurer Liable for Asbestos Claims

During the 1970s mining of vermiculite — a mineral most commonly used in insulation — several workers were injured due to asbestos exposure. It wasn’t until nearly three decades later, however, that the workers started presenting claims against their employer.

Those injured by the asbestos sued the state of Montana as early as 2002, alleging that the state knowingly allowed employees to work in vermiculite mines. In the lawsuit, the workers claimed the state knew as early as 1942 that the exposure was “in excess of safe limits.”

The suit also mentioned that an inspection in the 1950s reported a “considerable toxicity” in the air. The suit claimed the state failed in its duty to protect its workers.

While examining the suit, the state found documentation showing it held a general liability insurance policy with Berkshire Hathaway’s National Indemnity Co. from 1973 to 1975. The policy was written to protect the state from personal-injury and other claims. The state notified National Indemnity immediately of the potential liability and said the company should be liable for the suits’ costs.

In 2009, Montana reached a $43 million settlement with the miners. National Indemnity, at first, agreed to cover the settlements, even paying $16 million, but then later retracted the offer. It believed that the 1975 policy did not cover asbestos-related claims and believed it was not liable for the settlement.

In court, however, the state district judge ruled that National Indemnity breached its duty by failing to protect the state of Montana against damage claims made by asbestos victims. Therefore, the insurer could not deny settlement coverage.

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The judge also looked forward to potential claims. More than 850 additional claimants not included in the 2009 settlement had sued the state as of 2015. Like the 2009 ruling, any additional settlements would equally fall under the National Indemnity policy, the judge ruled.

Scorecard: National Indemnity Co. is responsible for the $43 million settlement stemming from asbestos-related claims dating as far back as 1973. Additionally, the insurer is responsible for any new settlements stemming from the incidence.

Takeaway: Past policies still hold firm and insurers may still be held liable, even 45 years later, if the cause of loss occurred during the policy period. &

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

Insurtech

Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”

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“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.

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“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?

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“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.