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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

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]