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Anne Freedman

Anne Freedman is managing editor of Risk & Insurance. She can be reached at

The Law

Legal Spotlight: September 15, 2014

A look at the latest decisions affecting the industry.
By: | September 15, 2014 • 5 min read
You Be the Judge

Insurer Wins Priest Abuse Case

Between 1979 and 1986, now-former priests of the Roman Catholic Church of the Diocese of Phoenix sexually abused adolescent males. The diocese settled four sexual abuse cases, and obtained partial coverage from its primary insurance carrier, Lloyd’s of London.

09152014_legal_spotlight_churchIts excess liability carrier, Interstate Fire & Casualty Co., (IFC) denied the diocese’s claim. The insurer sought a declaration that it was not responsible for coverage, while the church sought $1.9 million in damages, claiming breach of contract and bad faith.

The U.S. District Court for the District of Arizona found in favor of the church, but in a 2-1 decision, the U.S. 9th Circuit Court of Appeals reversed that decision in July.


The argument came down to whether “any” means “any” or whether it means “any one,” according to the majority opinion.

The insurance policy excluded liability “of any Assured for assault and battery committed by or at the direction of such Assured … .”

The appeals court agreed with IFC’s argument that “such Assured” refers back to “any Assured” — so that coverage would be excluded for “both the insured who committed the assault and battery as well as innocent co-insureds [referring to the diocese].”

It rejected the diocese’s “effort to infuse ambiguity into an otherwise clear agreement,” according to the opinion.

In a dissenting opinion, however, Senior Judge D.W. Nelson, found the wording more ambiguous, and said there were “three possible qualities that ‘such’ can refer to,” including Assureds facing liability; the “entire class of those covered by the policy;” or “those Assureds who committed or directed assault and battery.” Thus, she would have ruled in favor of the diocese.

The case was remanded to the lower court to determine attorneys’ fees and costs.

Scorecard: Interstate Fire & Casualty Co. was not responsible for more than $1.9 million in settlement costs.

Takeaway: The decision adds uncertainty to the so-called “any insured” exclusions, which generally are interpreted narrowly.

Warranty to Repair Supersedes an Implied Warranty

Doug and Karen Crownover spent “several hundred thousand dollars” to fix problems in the foundation and HVAC system at their Texas home, which was built by Arrow Development Inc.

In its October 2001 construction contract, Arrow had provided the Crownovers a warranty to repair work, but the developer failed to correct the problems or abide by an arbitrator’s ruling that ordered it to pay damages to the couple.

Arrow later entered bankruptcy, and the Crownovers sought recovery from Mid-Continent Casualty Co., which had issued a succession of comprehensive general liability policies to Arrow from August 2001 through 2008.

Mid-Continent denied the demand for payment, citing several exclusions in the policy. The couple then filed suit against the insurer for breach of contract, and a district court in Texas granted Mid-Continent’s request for summary judgment.

It based that decision — which was upheld by the U.S. 5th Circuit Court of Appeals in June — on a contractual-liability exclusion in the insurance policy.


That clause excludes claims when the insured assumes liability for damages in a contract or agreement unless the insured would be liable for those damages absent the contract. In this case, the contractual liability referred to the warranty to repair work that was included in the construction agreement.

The court rejected the couple’s argument that Arrow was liable for the repair work in the absence of the warranty because it had an “implied warranty of good workmanship.”

In its findings, the court ruled that the arbitrator found in favor of the Crownovers explicitly based on the warranty to repair, and that an express warranty supersedes an implied warranty. The court also ruled the arbitrator’s decision was based on Arrow’s failure to repair the work, not for the work done initially.

Scorecard: Mid-Continent Casualty Co. did not have to pay “several hundred thousand dollars” to the owners of a defectively built home.

Takeaway: The ruling aids insurers fighting indemnification in construction defect cases, as it narrows the scope of the contractual-liability exclusion that had been set in a recent Texas Supreme Court decision.

Effort to Focus on Condo’s Decreased Market Value Rejected

In 2010, a fire destroyed a commercial office condominium building owned by Whitehouse Condominium Group in Flint, Mich.

The Cincinnati Insurance Co. owed Whitehouse the “actual cash value” of that building at the time of loss. The question, eventually determined by the U.S. 6th Circuit Court of Appeals in June, was how much that actual cash value amounted to.

09152014_legal_spotlight_burningWhitehouse said its claim amounted to $2.8 million. Cincinnati Insurance said the value was only $1.2 million because of a decrease in market value.

The policy defined actual cash value as the “replacement cost less a deduction that reflects depreciation, age, condition and obsolescence.” At issue in the case was the definition of “obsolescence.”

While the insured argued the word related only to “functional” obsolescence — generally meaning something inherent to the building itself such as an outdated electrical panel — the insurance company said the word also included “economic” obsolescence, meaning a decrease in market value due to an external event.

Whitehouse said the insurer’s position was “definitional high jinks,” arguing that economic obsolescence is a “specialized concept used only in certain settings and does not fall within the general meaning of obsolescence.”


The U.S. District Court for the Eastern District of Michigan agreed with that position, ordering a summary judgment in favor of Whitehouse. On appeal to the 6th Circuit, a three-judge panel affirmed that decision.

Scorecard: The condominium association received $1.6 million more on its property claim due to the ruling.

Takeaway: When contract terms are ambiguous, the common definition applies, and in Michigan, in particular, if a term has two different reasonable interpretations, it is construed against the insurer.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at
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Unquantifiable Exposures

Top Five Uninsurable Risks

The complexities and nuances of these risks make it impossible for risk managers to find total coverage.
By: | September 2, 2014 • 11 min read
09012014_01_CS_700x525 PB

Whether it’s a Sriracha hot sauce maker being threatened with closure by city council or General Motors fighting for its reputation after recalling more cars than it made in the past three years, companies face a world of complex risks.

And some of those risks cannot be transferred via insurance products.


How well are companies protected, for example, when new regulations get passed — such as the EPA’s proposed restrictions on coal burning plants that may drive some in the energy industry out of business, or the current political drumbeat against tax inversion practices?

What insurance covers a company whose rogue employee sells trade secrets to an outside company? How about when a pandemic shuts down operations?

Risk managers identify their organizational exposures as best they can and then work to manage or eliminate those risks. Sometimes, commercial insurance can be used to remove the bulk of that risk, but we’ve isolated five risks which many experts believe are uninsurable in many respects: For the time being anyway.

“For the most part, the insurance industry rises to the occasion and creates products for emerging risks that evolve over time,” said Carol Laufer, executive vice president, ACE Excess Casualty.

“For insureds, the purchase of products such as employment practices and cyber insurance eventually evolves from a discretionary spend to standard insurance coverage,” she said.

09012014_01_CS_sidebarWhile some coverage is available, these five threats are considered mostly uninsurable: reputational risk, regulatory risk, trade secret risk, political risk and pandemic risk.

For sure there are other challenging risks — such as weak economic conditions or skilled talent shortages — that also are uninsurable, but we have selected those for which risk managers are able to play an effective role in mitigating the risk.

Part of the problem in transferring such risks is the complexity involved in the exposures. Look at tax inversion — where a U.S. company merges with a foreign company to change their tax jurisdiction and lower their tax burden.

Is that a political risk? A regulatory risk? A reputational risk? It could be any one of them, or all three of them.

“I think it’s almost uncountable the ways that a loss could occur where that loss could be tied back to reputational risk or regulatory risk,” said David White, a national actuarial leader at KPMG.

At the same time, calling a risk uninsurable has nuances to it. Coverage for criminal fines and penalties, for example, are truly uninsurable. The law forbids such coverage, said Patrick Donnelly, chief broking officer, Aon Risk Solutions.


But for other types of risks, there may be various products offered by brokers and underwriters to address some, but not all of the specific exposures faced by a company, he said. Such coverage, however, may be rare or expensive, or corporations may find risk transfer to be an ineffective way of hedging the risk.

“I’m very careful about branding something as truly uninsurable,” Donnelly said.

“It’s not black and white.”

Reputational Risk

General Motors might be the quintessential example of a company undergoing a reputational hit. It recalled nearly 30 million cars, and faces numerous lawsuits and investigations related to a delayed recall of 2.6 million cars — some manufactured more than a decade ago — with a faulty ignition switch that has been linked to 13 deaths and more than 50 accidents.

Video: As this report from the New York Times indicates, automakers have a long history of trying to maintain their reputations in the face of major recalls.

But every day brings another contender for the throne. One day, it’s American Apparel’s founder being suspended, and possibly eventually fired, for alleged sexual misconduct. Another day, it’s a viral video of a Comcast customer service representative who refuses to let a customer cancel his account.

Or it could be yet another cyber theft of customer information or a celebrity spokesman tweeting out an offensive comment.

While there are insurance products that provide coverage for crisis management/public relations costs and product recall expenses, only a limited market exists for loss of income or net profit for reputational harm, said Emily Freeman, global technology and privacy practice specialist at Lockton.

“You need to be able to wrap your arms around the risk and the value of risk before you can insure it,” said Tom Srail, senior vice president, Willis. “What a company name is worth has long been a risk to the industry.”

Freeman said Lockton has been involved in creating customized solutions for large clients that address specific threats of reputational harm. The client and underwriter negotiate the period of indemnity and loss adjustment, she said.

“The perils are not on an ‘all risk’ basis, but rather categories listed that are relevant to the client, such as disgrace of key persons or breach of sensitive data,” Freeman said.

“In my mind,” said KPMG’s White, “you can’t find policies that cover all types of reputational risk from whatever event that occurred.”

Regulatory Risk

When you think of regulatory risk, many risk managers keep an eye on the rules of the Health Information Portability and Accountability Act (HIPAA), the Dodd-Frank Act or a regulatory agency such as the Food & Drug Administration.

But the threat of regulation is immense and often unpredictable. In just one year, 2012, there were 17,763 changes to laws, rules and regulations affecting the banking and financial sectors alone, according to The Network, a training and compliance company.

“From a risk management or risk mitigation perspective, you can’t really predict regulations. You can prepare for them, but you can’t predict them or price them.” — David White, national actuarial leader, KPMG

Plus, risks can emanate from all sectors of government. One recent example is Huy Fong Foods, the manufacturer of Sriracha hot sauce, which was temporarily shut down by a judge following a lawsuit by the city council of Irwindale, Calif., after four families (one of which was related to a city councilman) complained about odors.

Eventually, the city dropped its lawsuit and its declaration that the factory was a “public nuisance,” but it took months for the situation to resolve itself.

“From a risk management or risk mitigation perspective, you can’t really predict regulations. You can prepare for them, but you can’t predict them or price them,” White said. “Regulatory risk is handled through risk mitigation, not risk transfer.”

Tom Srail, senior vice president, Willis

Tom Srail, senior vice president, Willis

“Even in the United States,” Srail said, “a government or state can put an industry or a company, if they want to, out of business or severely restrict their ability to operate.”

Certainly, the energy industry has been facing that threat since 2008 when President Obama noted that coal-powered plants can still be built, but at a steep regulatory cost.

“It’s just that it will bankrupt them because they are going to be charged a huge sum for all that greenhouse gas that’s being emitted,” Obama said.


While a final rule has not yet been issued by the Environmental Protection Agency, the president has recently called on it to enact new emissions regulations. The U.S. Chamber of Commerce estimated the regulations will cost the economy about $50 billion annually.

“There are some creative products underwriters have tried over the years … but there is definitely nothing off the shelf or run of the mill,” Srail said of regulatory risk.

“There’s nothing easy to do.”

Trade Secret Risk

“I find trade secrets to be one of the most dangerous areas,” said attorney Rudy Telscher, a partner at Harness Dickey & Pierce, who recently won a patent infringement case at the U.S. Supreme Court.

“There are no boundaries. It’s such a nebulous area.”

It can include anything from a disgruntled employee taking customer lists or R&D information to his next job, a foreign government stealing trade secrets or a hacker burrowing into a computer system to steal a company’s version of its special sauce.

Globalization and the expanded use of supply chain partners increase the potential exposure. Plus, even when a company is able to pursue trade secret litigation, courts consider whether reasonable precautions had been taken to secure the proprietary information.

“The violation,” said Bob Fletcher, president, Intellectual Property Insurance Services Corp., which offers insurance to litigate intellectual property cases, “is not the use [of a trade secret]. The violation is, ‘How did you get the information?’ ”

In any event, said Aon’s Donnelly, “an organization would have a very difficult time obtaining an insurance policy that adequately protects them against the theft or wrongful disclosure of their trade secrets and the potential damage that could do to the company if that trade secret got out.”

Rudy Telscher, partner, Harness Dickey & Pierce

Rudy Telscher, partner, Harness Dickey & Pierce

More common than industrial espionage, however, are the run-of-the-mill business discussions that revolve around synergies and potential partnerships between enterprises. Often, the nondisclosure agreements (NDAs) covering such discussions are not specific enough to protect the parties, Telscher said.

It is the party receiving the information that is most at risk, he said. If the discussions dissolve, that party may find itself accused of acting upon trade secrets because the NDA did not specify the information that was to be disclosed and held confidential.

“The more information you receive, the greater the risk there will be a lawsuit if you don’t end up doing a deal and you move forward on your own,” Telscher said.

Political Risk

In this era of globalization, companies establish operations all over the world, and the world is not a stable place.

Upheaval — or the increasing threat of it — is prevalent on just about every continent of the globe. Certainly, the possibilities in the Middle East, Eastern Europe, Asia and Latin America are concerning to risk managers.

An Emergencies Ministry member walks at a site of Malaysian airliner flight MH17, which was brought down over eastern Ukraine, killing all 295 people aboard.

An Emergencies Ministry member walks at a site of Malaysian airliner flight MH17, which was brought down over eastern Ukraine, killing all 295 people aboard.

While political violence and trade credit coverage is available in the majority of cases, companies continue to face uninsurable exposures.

“It’s definitely tricky,” said Mark Garbowski, a shareholder at Anderson Kill.


“Based on the policies I have seen, there will always be some aspects of it that will be fully outside the scope of what can be covered.”

And only “a minority” of companies actually buy the cover, said John Hegeman, AIG senior vice president, specialty lines-political risk.

“I think the principal reason is most risk managers view it as a self-insured business risk,” he said.

“Pretty much anything an insured thinks is really essential to their operations can be covered, but you have to identify it and understand what it is.”

Often, said Richard Maxwell, chief underwriting officer and global head of political risk and trade credit insurance for XL Group, corporations wait too long in the face of deteriorating conditions and insurers will not accept the risk.

“Buy the cover before the barn is on fire,” he said.

Generally, policies cover a host of risks, including government expropriation of an asset, destruction of an asset due to war or political violence, credit default of trade receivables, and when foreign governments block transfer and convertibility of currency.

Some countries, such as Iran, Iraq, Afghanistan and the like, are not insurable, said Jochen Duemler, CEO and head of Euler Hermes Americas Region, which offers risk coverage in nearly 200 countries.

Argentina is a recurring problem, and as for Venezuela, it’s not uninsurable, he said, “but we would say we pretty much have no exposure there and are very, very reluctant” to offer coverage.

Overall, policies exclude losses that occur when currency is devalued, losses that occur as a result of a nuclear incident and non-payment of premium, or any losses to suppliers or partners as a result of political violence, except for trade receivables.

Policies also require insureds to make certain warranties and representations that are included in the insurance contract.

Policy disputes can arise when property is expropriated or licenses are cancelled due to what a foreign government says are reasonable or legally justified regulatory actions, according to an article on political risk coverage by Robert C. Leventhal, an attorney with Foley and Lardner.

Another area of dispute emerges when assets are jeopardized by “creeping expropriations,” such as a series of actions by the government as opposed to a single act, he said.

Pandemic Risk

Many risk managers aren’t too worried about the Ebola pandemic in West Africa that has already killed more than 900 people. And they probably aren’t all that worried — if they even know — about the four cases of pneumonic plague in Colorado that are life-threatening.

But who among them can forget the H1N1 pandemic influenza virus known as the swine flu, that in 2009 killed more than 250,000 people worldwide, including more than 3,600 in North America.

At one point, the U.S. Centers for Disease Control and Prevention estimated that as many as two in five workers might become infected or have to stay home to care for an ill family member.

Video: Researchers at the Massachusetts Institute of Technology studied the role airports play in spreading disease and pandemics, according to this report by Voice of America.

A pandemic flu is something all risk managers should worry about. And there’s no coverage for it.

“A pandemic is a very difficult exposure to insure in any meaningful way. You can do some work around it, but it’s a very, very difficult risk to insure and no one really insures it,” said John McLaughlin, managing director of the higher education practice at Arthur J. Gallagher & Co.

For schools or universities, his specialty, there may be some loss of tuition coverage available, but “it’s not very cost effective.”


For business, supply-chain insurance may offer some protection, but that coverage still has a limited take-up.

Companies may also be able to craft special wording for property or D&O policies, he said.

“You never say never. There’s always some solution that you can work up,” he said.

But, McLaughlin said, a healthier perspective for a risk manager is to analyze how the risk would impact the organization and to devise solutions that are not insurance-related.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at
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The Law

Legal Spotlight: September 1, 2014

A look at the latest decisions affecting the industry.
By: | September 2, 2014 • 6 min read
You Be the Judge

Excess Policy Off-Limits to Company

In 2008, Martin Resource Management Corp. (MRMC), a company with $3 billion in annual sales, was accused in a Texas state court of wrongdoing in a shareholder derivative action filed by two brothers, which affected control of the company.

MRMC eventually settled that litigation for an undisclosed price in 2012, including repurchase of all shares held by Scott D. Martin and SKM Partnership Ltd. About the same time, the corporation filed suit against its primary and excess D&O insurers for defense in the underlying litigation.


The company later settled its suit against Zurich American Insurance Co. — which held a $10 million primary D&O policy from Feb. 1, 2008 to Feb. 1, 2009 — for less than the policy limit, according to court documents. MRMC also settled with Arch Insurance Co., which had issued a $10 million excess policy, in a confidential agreement.

That left Axis Insurance Co., which also held a $10 million excess policy, as the remaining insurer in the MRMC lawsuit. In seeking summary dismissal of the litigation, Axis argued that its policy was not triggered because the underlying limit in the Zurich policy was not “exhausted by actual payment.”

The corporation argued that the Axis policy language was ambiguous — that it did not “clearly state that ‘actual payment requires payment of the full limit of the underlying Zurich policy’ by Zurich alone,” according to court documents.

MRMC also argued that entering a settlement agreement was consistent with Texas public policy, and that by allowing excess insurers to “escape their coverage obligations based solely on settlements with underlying insurers for less than total policy limits, policyholders will have no choice but to fight every coverage case to the bitter end to avoid forfeiture of their excess coverage.”

The Harris County Judicial District of Texas disagreed with MRMC’s position, and dismissed the case. On appeal to the U.S. District Court for the Eastern District of Texas, a federal judge agreed with the lower court, stating that “it is clear that in order to trigger the Axis policy, Zurich must have paid the full amount of its limit of liability as specified in the Zurich policy.”

Scorecard: Axis need not pay up to the $10 million in excess policy limits.

Takeaway: Efforts to emphasize portions of policy language in isolation are usually unsuccessful. Policy language must be read in context of the entire policy.

Checkout Practices Negate Coverage

Since August 2009, Urban Outfitters (UO) has collected ZIP code information at checkout, in violation of Massachusetts law, according to a class-action lawsuit filed by customers.

Similar allegations were filed against the company in California, claiming the practice of collecting ZIP codes since February 2010 violated the Song-Beverly Credit Card Act of 1971.

09012014_legal_spotlight_shopA third suit, filed in the District of Columbia, against UO and its Anthropologie subsidiary made similar accusations — that the ZIP code collection since June 2010 violated the district’s laws.

While slightly different, the state and district regulations generally forbade companies from requesting “personal identification information;” from misrepresenting the fact that providing such information was not required to complete a purchase; from engaging in unfair and deceptive business practices; and from invading customer privacy.

UO sought indemnification and duty-to-defend coverage from OneBeacon America Insurance Co., which had issued successive commercial general liability and umbrella policies beginning July 7, 2008 and ending July 7, 2010. OneBeacon also issued a similar policy for July 7, 2010 to July 7, 2011, which was a “fronting” policy for which the Hanover Insurance Group is responsible. Hanover issued successive CGL and umbrella policies from July 7, 2011 to July 7, 2013.


When coverage was denied, UO and Anthropologie sought a court declaration that the insurers must defend and/or indemnify them. The carriers asked for dismissal of the case — and the insurers’ motions were ultimately granted by the U.S. District Court for the Eastern District of Pennsylvania.

Judge Stewart Dalzell agreed with the carriers that, in the District of Columbia case, there was no coverage under the “personal and advertising injury provision” because the information was not “published,” under the common use of the word, as it was shared only between the insured and its customer.

In the California case, the court found that the companies did “publicize” the information by sharing it with third parties for marketing purposes, but that coverage should be denied because of an exclusion in the policies for statutory violations.

The court also rejected coverage for the action in Massachusetts, which alleged the receipt of junk mail was a “breach of their privacy,” because the term, “privacy” is confined to “secrecy interests,” and not to “intrusions upon seclusion.”

Scorecard: The carriers did not have to indemnify or pay for a defense. In just one of the lawsuits, each statute violation subjected the corporations to $1,500 per violation.

Takeaway: The collection of ZIP code information leaves organizations vulnerable to a variety of legal claims.

Insurer Did Not Have to Pay for Defense

In 2002, Paul Schoen filed a lawsuit alleging securities claims against Amerco, the parent of truck rental company U-Haul, which was founded by his father and is controlled by the Schoen family.

Amerco sought coverage under its directors’ and officers’ policy issued by National Union Fire Insurance Co., and was denied. The insurer cited “insured vs. insured” provisions, which excluded coverage for any claims involving “any security holder of the company” and unless such a claim was “totally without the solicitation of, or assistance of, or active participation of, or intervention of, any member of the Schoen family.”

09012014_legal_spotlight_courtroomAfter that claim was denied, two more lawsuits were filed against Amerco, and all three were consolidated by the courts. National Union again denied coverage, citing the participation of Paul Schoen. The situation reoccurred when two additional actions were filed, and all were consolidated into one court action.

In 2006, pursuant to a ruling of the Nevada Supreme Court, which reversed a lower court order dismissing the case, the plaintiffs were permitted to amend their pleadings. Instead of filing separate complaints, as the court permitted, they filed a single consolidated complaint, with Paul Schoen’s counsel acting as lead counsel.

Six years later, the cases were settled, with the plaintiffs gaining “nothing by way of settlement,” and court costs for Amerco exceeding $9 million.


In 2013, the company filed suit against National Union, alleging breach of contract and bad faith in denying the claim. Those allegations were rejected in May by a federal judge in the U.S. District Court for the District of Arizona.

In the opinion, Judge Paul G. Rosenblatt ruled that the claims in the consolidated court action “were not prosecuted totally independently of Paul Schoen, totally without Schoen’s assistance, and totally without Schoen’s active participation, and therefore the exclusion provisions apply.”

Scorecard: National Union Fire Insurance Co. will not have to pay a $9 million claim for defense costs in a shareholder lawsuit.

Takeaway: Regardless of the complexity of the litigation, the policy language was unambiguous as to its exclusions.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at
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