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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

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]