The Law

Legal Spotlight

A look at the latest decisions affecting the industry.
By: | August 4, 2014 • 6 min read

Insurer Must Pay $2 Million Claim

On a normal day, Armored Money Services (AMS) would pick up about $2 million from various New York agent locations for the Omnex Group Inc., a provider of money transfer services.

That money would then be held in a secure vault and deposited within a few days into a bank account in Omnex’s name.

But on Feb. 8, 2010, Robert Egan, president of AMS, was arrested by the FBI and charged with bank fraud. The contents of the vault — about $19 million — were seized by the federal government and later put in the care of a trustee.


It ultimately was discovered that the company owed more than $68 million to its customers on top of the $2 million owed to Omnex. Egan and the COO of the company, Bernard McGarry — both of whom eventually pleaded guilty and were imprisoned — admitted to “playing the float, i.e., using the continual influx of cash to cover the operating expenses of AMS and the affiliated company, repay prior obligations to other customers, and make officer loans,” according to a New York appeals court.

In May, the appeals court upheld a lower court decision that ruled U.S. Fire Insurance Co. should pay Omnex Group the $2 million it lost that February day, minus a $100,000 deductible as set forth in the company’s commercial crime policy.


A lower court judge, Ira Gammerman of the New York Supreme Court, had ruled that the policy covered loss of money in the custody of a “messenger” resulting from theft, disappearance or destruction.

“In its opposing papers,” the judge said during a hearing in December 2012, “the insurance company spends a great deal of time in opposition arguing why this is not a theft, but I don’t care whether it’s a theft or not. It’s a disappearance and disappearance is one of the covered events.”

He also ruled that a section in the policy that excluded losses resulting from seizure or destruction of property by governmental action did not apply, saying the seizure by the government “was not the contributing cause of the plaintiff’s loss, rather it was the fraud committed [by AMS] … .”

Summary: U.S. Fire Insurance Co. must pay a wire transfer company $2 million, which disappeared along with $68 million owed by an armored car company.

Takeaway: Although the term “disappearance,” was not defined in the policy, the court ruled that its “plain ordinary meaning” should apply.

Policy Voided Due to Misrepresentation

Namco Financial Exchange Corp. sought a commercial crime policy for
primary and excess coverage from Liberty Mutual, Zurich American Insurance Co., Axis Insurance Co., and Twin City Fire Insurance Co., for the period of Aug. 15, 2007 to Aug. 15, 2008.

In response to a question on the insurance application, Namco said it did not keep proceeds from IRS Section 1031 transactions — which have to do with tax-deferred property gains — separate from its operating funds.  Because of that response, the insurers denied issuance of policies.

Lockton, Namco’s broker, relayed the rejections to the company and informed Namco that “as a condition of coverage, proceeds from 1031 transactions are to be held in bank accounts segregated from those of your operating funds … .” The broker instructed Namco to “confirm that this is done,” before returning an updated insurance application.

Namco followed those instructions as to the application, but the company’s procedures never changed, according to the U.S. District Court for the Central District of California, which dismissed a lawsuit against the insurers.

The lawsuit was filed by Heidi Kurtz, who was appointed trustee of the company after it went into Chapter 7 bankruptcy in 2009. Kurtz submitted insurance claims contending that Namco had misappropriated in excess of $35 million. When the claims were denied, she filed suit.

The federal court rejected her arguments that the insurance policy (not the application) did not require the funds be segregated; that the insurers needed to prove the misrepresentation on the application was intentional; that the insurers should have investigated the company after it changed its answer to that one question; and that the insurers did not promptly respond to the claim request.

“In this case,” wrote Judge Dolly M. Gee, “there is uncontroverted testimony from each insurer that it would not have issued the policy if [Namco] had answered the question differently.” She granted the insurers a summary judgment in the lawsuit in April.

Summary: Four insurance companies need not pay claims in excess of $35 million to the trustee of a bankrupt company.

Takeaway: Even if a company’s procedures are arguably in compliance with an insurance policy’s requirements, a material misrepresentation in applying for that policy will void coverage.

Contractor Ordered to Repay Insurer

Thomas VanDuinen, who operated Northern Building Co., was selected in 2008 to perform work at Midway International Airport in Chicago under the supervision of Parsons Infrastructure & Technology Group Inc., which served as project manager.

Hanover Insurance Co. issued a surety bond on Northern’s behalf.

Hanover became involved in the project in 2009 when two subcontractors complained that Northern failed to pay them a total of $205,950, halting the project.


Hanover demanded collateral and indemnification from Northern under its agreement, a demand which was refused by the general contractor.

In March 2011, Hanover filed suit against Northern and VanDuinen to force compliance. The insurer sought $127,086 of contract funds, which it was eventually paid although it had been held for a time by the Federal Aviation Administration (FAA) when the work was stopped.

Hanover also sought payment for attorneys’ fees and costs incurred in resolving the performance and payment claims against the bond. Those fees now total $76,000.

Hanover eventually stepped into Northern’s role as general contractor and arranged for completion of the project.

In September 2012, Hanover paid $127,452 to a trustee for one of the subcontractors, which had filed for bankruptcy. That amount settled both subcontractor claims. Earlier, Hanover agreed to resolve Parson’s bond claim for performance, and $127,086, which had been withheld from Northern by the FAA, was paid to Hanover.


Northern disputed Hanover’s arguments in the litigation, but a district court in Illinois issued a summary judgment in favor of the insurer. A three-judge panel on the U.S. 7th Circuit Court of Appeals upheld that decision in May.

“Northern has tried to make this into a multi-issue, complex proceeding. But it is actually very simple,” the federal appeals court judges wrote, noting that the agreement was “clear and unambiguous in all relevant aspects. Northern clearly breached it; Hanover did not.”

The court also offered some “closing advice” to Northern to “carefully consider” how long it wanted to continue to “drag his case out. Hanover’s attorney expenses are only going to increase.”

Summary: The court ruled the general contractor must pay the insurer $200,000, which includes $76,000 in attorneys’ fees.

Takeaway: An actual liability for a breach of the bond is not necessary for a surety bond agreement to be triggered. The insurer needs only a claim against the bond to trigger its rights and responsibilities.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Report: Marine

Crewless Ships Raise Questions

Is a remote operator legally a master? New technology confounds old terms.
By: | March 5, 2018 • 6 min read

For many developers, the accelerating development of remote-controlled and autonomous ships represents what could be the dawn of a new era. For underwriters and brokers, however, such vessels could represent the end of thousands of years of maritime law and risk management.

Rod Johnson, director of marine risk management, RSA Global Risk

While crewless vessels have yet to breach commercial service, there are active testing programs. Most brokers and underwriters expect small-scale commercial operations to be feasible in a few years, but that outlook only considers technical feasibility. How such operations will be insured remains unclear.

“I have been giving this a great deal of thought, this sits on my desk every day,” said Rod Johnson, director of marine risk management, RSA Global Risk, a major UK underwriter. Johnson sits on the loss-prevention committee of the International Union of Maritime Insurers.

“The agreed uncertainty that underpins marine insurance is falling away, but we are pretending that it isn’t. The contractual framework is being made less relevant all the time.”

Defining Autonomous Vessels

Two types of crewless vessels are being contemplated. First up is a drone with no one on board but actively controlled by a human at a remote command post on land or even on another vessel.

While some debate whether the controllers of drone aircrafts are pilots or operators, the very real question yet to be addressed is if a vessel controller is legally a “master” under maritime law.


The other type of crewless vessel would be completely autonomous, with the onboard systems making decisions about navigation, weather and operations.

Advocates tout the benefits of larger cargo capacity without crew spaces, including radically different hull designs without decks people can walk on. Doubters note a crew can fix things at sea while a ship cannot.

Rolls-Royce is one of the major proponents and designers. The company tested a remote-controlled tug in Copenhagen in June 2017.

“We think the initial early adopters will be vessels operating on fixed routes within coastal waters under the jurisdiction of flag states,” the company said.

“We expect to see the first autonomous vessel in commercial operation by the end of the decade. Further out, around 2025, we expect autonomous vessels to operate further from shore — perhaps coastal cargo ships. For ocean-going vessels to be autonomous, it will require a change in international regulations, so this will take longer.”

Once autonomous ships are a reality, “the entire current legal framework for maritime law and insurance is done,” said Johnson. “The master has not been replaced; he is just gone. Commodity ships (bulk carriers) would be most amenable to that technology. I’m not overly bothered by fully automated ships, but I am extremely bothered by heavily automated ones.”

He cited two risks specifically: hacking and fire.

“We expect to see the first autonomous vessel in commercial operation by the end of the decade. Further out, around 2025, we expect autonomous vessels to operate further from shore — perhaps coastal cargo ships. For ocean-going vessels to be autonomous, it will require a change in international regulations, so this will take longer.” — Rolls-Royce Holdings study

Andrew Kinsey, senior marine risk consultant, Allianz Global Corporate & Specialty, asked an even more existential question: “From an insurance standpoint, are we even still talking about a vessel as it is under law? Starting with the legal framework, the duty of a flag state is ‘manning of ships.’ What about the duty to render assistance? There cannot be insurance coverage of an illegal contract.”

Several sources noted that the technological development of crewless ships, while impressive, seems to be a solution in search of a problem. There is no known need in the market; no shippers, operators, owners or mariners advocate that crewless ships will solve their problems.

Kinsey takes umbrage at the suggestion that promotional material on crewless vessels cherry picks his company’s data, which found 75 percent to 90 percent of marine losses are caused by human error.


“Removing the humans from the vessels does not eliminate the human error. It just moves the human error from the helm to the coder. The reports on development by the companies with a vested interest [in crewless vessels] tend to read a lot like advertisements. The pressure for this is not coming from the end users.”

To be sure, Kinsey is a proponent of automation and technology when applied prudently, believing automation can make strides in areas of the supply chains. Much of the talk about automation is trying to bury the serious shortage of qualified crews. It also overshadows the very real potential for blockchain technology to overhaul the backend of marine insurance.

As a marine surveyor, Kinsey said he can go down to the wharf, inspect cranes, vessels and securements, and supervise loading and unloading — but he can’t inspect computer code or cyber security.

New Times, New Risks

In all fairness, insurance language has changed since the 17th century, especially as technology races ahead in the 21st.

“If you read any hull form, it’s practically Shakespearean,” said Stephen J. Harris, senior vice president of marine protection UK, Marsh. “The language is no longer fit for purpose. Our concern specifically to this topic is that the antiquated language talks about crew being on board. If they are not on board, do they still legally count as crew?”

Harris further questioned, “Under hull insurance, and provided that the ship owner has acted diligently, cover is extended to negligence of the master or crew. Does that still apply if the captain is not on board but sitting at a desk in an office?”

Andrew Kinsey, senior marine risk consultant, Allianz Global Corporate & Specialty

Several sources noted that a few international organizations, notably the Comite Maritime International and the International Maritime Organization, “have been very active in asking the legal profession around the world about their thoughts. The interpretations vary greatly. The legal complications of crewless vessels are actually more complicated than the technology.”

For example, if the operational, insurance and regulatory entities in two countries agree on the voyage of a crewless vessel across the ocean, a mishap or storm could drive the vessel into port or on shore of a third country that does not recognize those agreements.

“What worries insurers is legal uncertainty,” said Harris.

“If an operator did everything fine but a system went down, then most likely the designer would be responsible. But even if a designer explicitly accepted responsibility, what matters would be the flag state’s law in international waters and the local state’s law in territorial waters.


“We see the way ahead for this technology as local and short-sea operations. The law has to catch up with the technology, and it is showing no signs of doing so.”

Thomas M. Boudreau, head of specialty insurance, The Hartford, suggested that remote ferry operations could be the most appropriate use: “They travel fixed routes, all within one country’s waters.”

There could also be environmental and operational benefits from using battery power rather than conventional fuels.

“In terms of underwriting, the burden would shift to the manufacturer and designer of the operating systems,” Boudreau added.

It may just be, he suggested, that crewless ships are merely replacing old risks with new ones. Crews can deal with small repairs, fires or leaks at sea, but small conditions such as those can go unchecked and endanger the whole ship and cargo.

“The cyber risk is also concerning. The vessel may be safe from physical piracy, but what about hacking?” &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]