The Law

Legal Spotlight

The latest decisions impacting the industry.
By: | December 10, 2014 • 5 min read
You Be the Judge

Jury Rules in Favor of Insured

Sometime between Jan. 12, 2009 and February 5, 2009, one or more individuals entered the disc jockey’s room at the Cabo Wabo Cantina and Memphis Blues nightclub in Fresno, Calif., and stole about $140,000 of electronic equipment including HD televisions, speakers and sound mixers.

Fresno Rock Taco, which operated the cantina and nightclub, reported the theft to the police upon the advice of its broker, and filed a claim with National Surety Corp., a Fireman’s Fund Co., for the equipment, property damage and for loss of business income. It had two insurance policies with respective limits of $2.6 million and $6.1 million.

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Fresno Rock, along with Zone Sports Center LLC, owner of the property at the time of the theft, filed suit against National Surety when the claim was denied.

The insurance company alleged the loss of equipment was due to repossession rather than theft, according to court documents.

Cabo Wabo denied repossession was involved, and noted in court documents that a search of the premises by the state Department of Insurance for possible insurance fraud “revealed no wrongdoing of any kind and no charges of insurance fraud or any other crime have been filed against anyone connected to this matter.”

After a trial in the U.S. District Court for the Eastern District of California, Fresno Division, a jury ruled on Aug. 22 that Cabo Wabo and Zone Sports had suffered a covered loss and did not make a false claim to the insurance company.

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It ordered the insurer to pay $2.2 million to Cabo Wabo for business interruption losses and about $275,000 to the property owner for property damage losses.

Scorecard: The insurance company was ordered to pay $2.5 million for the claim.
Takeaway: National Surety’s belief that the theft was questionable and that security measures were inadequate did not sway the jury.

Insurer Need Not Pay Auto Settlement

Tyler Roush was driving his mother’s car on Aug. 3, 2009 when he struck and severely injured a pedestrian, Lloyd Miller.

Miller and his wife Nancy filed suit against Roush and his parents, Sharon and George Roush, and Brash Tygr, which owned and operated a Sonic Drive-In restaurant in Carrollton, Mo. The parents owned 75 percent of Brash Tygr; Tyler and his brother Brandon each owned another 5 percent.

The company was covered as part of a commercial lines master policy issued to Sonic Insurance Advisory Trust by Hudson Specialty Insurance Co. The CGL policy had a Hired and Non-Owned Auto Liability endorsement, under which the family and franchise sought coverage.

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Hudson provided a defense, under a reservation of rights, until the family rejected that defense and settled the Millers’ lawsuit for $5.8 million in compensatory and punitive damages, according to court documents. At the same time, the family admitted that Tyler Roush was “conducting the business of Brash Tygr” during the accident.

Tyler Roush, who had not worked for the restaurant for a long time, had been on some errands for his mother at the time of the accident. While he was depositing his mother’s paycheck at a local bank, an employee had handed him some bank deposit bags for use by Sonic Drive-In, according to court documents.

Because of that action, the U.S. District Court for the Western District of Missouri-Kansas City ruled that Roush had “a dual purpose” in his travels and was acting “in the course of [the restaurant’s] business.”

On appeal, the U.S. 8th Circuit Court of Appeals on Oct. 7 disagreed. In a 2-1 decision, the majority ruled there was no dual business purpose. It ruled that “picking up the bags was a matter of convenience, not necessity, for Brash Tygr and the Sonic Drive-In.”

In his dissent, Judge Kermit Bye said it was uncontroverted that Brash Tygr used such deposit bags and that the company did not have “a limitless supply.” Thus, at some point, an employee would have needed to “make a special trip to the bank for deposit bags if Tyler Roush had not brought them to his parents’ home.”

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The court also ruled that Hudson had not been given an opportunity to contest coverage in the wake of the family’s admission that Tyler Roush had been acting in the course of business.

Scorecard: The insurance company did not have to cover any of the $5.8 million in settlement costs.
Takeaway: Accepting the deposit bags “was a ‘casual and incidental’ aspect of a purely personal trip that did not give that trip a dual business purpose under Missouri law,” according to the court’s majority opinion.

Insurer Must Pay for Explosion Costs

In 2009, A.H. Meyer’s plant in Winfred, S.D., exploded for the second time in five years. The cause was heptane, a highly volatile solvent manufactured by Citgo Petroleum Corp., which is used in the production of beeswax.

After the first explosion in 2004, A.H. Meyer redesigned the plant so that electrical switches were at least five feet away — the recommended distance — from the 150-gallon storage “kettle” of heptane at the factory. In the previous plant, the distance had only been four feet. The company also added a ventilation system, as recommended.

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Nonetheless, an explosion occurred in 2009 when heptane spilled from the kettle and an employee pressed a switch to turn off a pump, according to court documents. Nationwide Insurance Co., which paid for the damage, filed a subrogation suit against Citgo, the manufacturer, and Barton Solvents, the supplier of the heptane.

It argued the companies were liable and negligent because the warnings were inadequate. A safety expert it hired said that the ventilation system meant to reduce risk was actually the reason for the explosion.
Nationwide also argued the companies had provided an express and implied warranty of the heptane.

Both the Circuit Court of the Third Judicial Lake County and the state Supreme Court disagreed, granting the defendants’ motion for summary judgment.

The South Dakota Supreme Court ruled that both the supplier and manufacturer “collectively warned that heptane was volatile and explosive,” and that A.H. Meyer complied with all safety recommendations.

“Ultimately, Nationwide’s inadequate warning claim is based on nothing more than the fact of the accident, speculation, and conjecture,” it ruled.
It also said that pointing out danger is not the same as a warranty, which implies a promise.

Scorecard: Nationwide’s attempt to subrogate the costs for repair were denied.
Takeaway: A safety warning is “an alert,” while a warranty is a “promise that the thing being sold is as represented,” the court ruled.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at afreedman@lrp.com.
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Retail Data Exposures

Emerging Ways to Pay

New e-payment systems offer some data security advantages but they face implementation difficulties.
By: | November 17, 2014 • 6 min read
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With massive data breaches among big box retailers and major banks consistently making headlines, the cry for more secure consumer payment methods has reached a crescendo.

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Yet, the critical question remains: Will emerging technologies — from “chip/pin” credit cards to Apple Pay, Google Wallet and other similar e-payment products — stem the data risk tide?

And if so, will there be a winner among the group? Will there be a single payment system that can give both retailers and their customers a sense of security that currently doesn’t exist?

It’s much too early to tell, experts said. The main challenge now may be sorting through the various technological options — in addition to the potential cost and difficulty of implementing a new standard system.

Video: Mashable took Apple’s new payment system to the streets of New York City to see how it worked.

For example, some large retailers such as Wal-Mart, Rite Aid and CVS recently announced they would not accept Apple Pay, which uses the iPhone and major credit cards as its “touchless” payment delivery system.

Those large retailers and others are planning to use an alternative e-payment technology, called CurrentC, which bypasses major credit cards completely. The retailers favor that system because it eliminates the transaction fees charged by credit card companies to retailers.

According to Aaron Press, director of e-commerce and risk solutions at LexisNexis Risk Solutions in Dallas, each of the various mobile wallet systems has its own advantages.

One key benefit of systems such as Apple Pay and CurrentC is that they do not pass actual card data to the merchant, so there is no account information either in storage or in transit that can be compromised.

“If the wallet systems are secure, then consumers benefit from not sharing their payment credentials with merchants,” he said. “This means that even in the event of a breach, the consumer will not have to worry about their information being stolen and dealing with the hassle of disputing fraudulent charges or receiving new account numbers.”

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In addition, said David Katz, leader of the privacy and information security practice group at Nelson Mullins in Atlanta, Apple Pay’s biometric Touch ID technology makes it “difficult for a thief or imposter to use an iPhone to complete transactions fraudulently.

“Consumers whose phones are stolen or misplaced can easily use the ‘Find my iPhone’ feature to suspend all payments,” he said.

“Even if the world magically adopted chip/pin technology overnight, hackers would simply find a new way to turn card data into money.” — Russ Spitler, vice president of product management, AlienVault

However, he added, with 800 million credit cards on file — not to mention the brand new watch/fitness trackers that contain large amounts of health data — Apple may have succeeded in making itself the primary target.

Press noted that it is not yet clear whether Apple Pay or CurrentC will be vulnerable to fraudulent use.

E-wallet providers must ensure that the credentials being provisioned and used actually belong to the consumer attempting to use them, and that the applications, processes and infrastructure are secure, he said. The biometrics used with the Apple Pay process are helpful, but not a panacea.

Biometric Advances

Apple Pay, however, represents a security improvement over magnetic stripe architecture since it requires stealing a victim’s phone and successfully duplicating their fingerprint to commit fraudulent transactions, said Paco Hope, principal consultant at security consulting firm Cigital, in Dulles, Va.

Apple Pay also includes architecture (such as proxy numbers instead of account numbers) that contributes additional security, he said.

Russ Spitler, vice president of product management at AlienVault, a security provider in San Mateo, Calif., called Apple Pay a “major move” for the payment industry.

While the underlying technology is not new, Apple has the market share and mindshare to make it popular, he said. Shifts in payment technology are driven by consumer demand, not retailer preference.

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“In the past, Apple has proven to manage private data very responsibly — they take encryption seriously and implement it well,” Spitler said. “They are still prone to attacks against their users such as the recent iCloud issues — but they are working to add more features to help safeguard even in that situation.

“With Apple Pay, I am hopeful we will turn the corner on the horrible status quo of credit cards,” he said.

Structural Challenges

Because the U.S. adopted credit cards faster than they spread across Europe, Spitler said, the infrastructure in the U.S. is antiquated and entrenched, such as the point-of-sale (POS) systems reliant on magnetic stripe technology.

Moving past that to new EMV-based credit cards (also referred to as chip-and-PIN, chip-and-signature, chip-and-choice, or generally as chip technology) will require a major retrofit of a very distributed payment system in use for a long period of time, he said.

Video: A brief look at some of the advantages and challenges with EMV technology.

“Each corner store will have to invest in new technology at great cost to themselves and without any demand from the consumer; that’s a really difficult request to make of a small business,” he said.

EMV supports dynamic authentication (numbers change with each transaction), which means a cardholder’s data is more secure on a chip-enabled payment card than on a magnetic stripe card, and is much more difficult to copy or counterfeit.

“Magnetic stripe technology makes it dirt simple to clone a card once you have the electronic data associated with it,” Spitler said.

However, he said, the use of chip/pin technology does not guarantee the long-term elimination of risk.

“Even if the world magically adopted chip/pin technology overnight, hackers would simply find a new way to turn card data into money,” Spitler said.

Hope said that payment networks are introducing risk management beyond simply accepting or denying charges. Contactless payment systems deployed in the UK, for example, are usually dependent upon a variety of limits on total amount, number of transactions and transactions per time period.

“This is what it looks like when modern risk management meets the retail experience: the strength of the security measures in place,” he said. “Retail customer data in the future will be much more carefully protected using similar designs.”

Cyber Coverage

Regardless of what type of payment system is used, Collin Hite, who leads the insurance recovery group at Hirschler Fleischer in Richmond, Va., said all businesses should have cyber insurance, even though many companies still don’t believe they are likely targets.

The first party aspects of such coverage can be critical to a business since the insurance pays for forensic investigation and re-securing the network, in the event of a data breach, he said.

“This is typically the largest cost — not the actual loss of information of the consumers,” he said.

“While we know the Fortune 500 to 1000 are considering specific cyber coverage, middle-market businesses need to understand that they are as vulnerable as the ‘big boys,’ ” he said.

Craig Young, a mobile security researcher for Tripwire, in Portland, Ore., said the best risk management strategy is to move to the next technology as quickly as possible.

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“The ancient swipe and sign technology that dominates American retail is long overdue for a funeral,” he said. “For years, credit cards have been low-hanging fruit for thieves with a variety of techniques to steal card data, reproduce cards and start spending.”

LexisNexis’ Press added that it’s way too early to declare a front runner in mobile payments, and that magnetic stripe cards will be around for several more years.

“There is no security salvation or fraud magic bullet, but many of the new technologies offer a lot of promise,” Press said. “EMV will drastically improve POS security and reduce counterfeit fraud.  Biometrics is a promising option for identity verification.”

But, he warned, new technologies can open the window to new problems while shutting the door to known issues. Adding new technologies such as mobile, he said, increases the number of potential blind spots.

“Companies need to evaluate the risks and benefits of adding any new commerce technology or channel to their environment,” Press said.

Tom Starner is a freelance business writer and editor. He can be reached at riskletters@lrp.com.
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Sponsored: Liberty International Underwriters

From Coast to Coast

Planning the Left Coast Lifter's complex voyage demands a specialized team of professionals.
By: | January 7, 2015 • 5 min read

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The 3,920-ton Left Coast Lifter, originally built by Fluor Construction to help build the new Bay Bridge in San Francisco, will be integral in rebuilding the Tappan Zee Bridge by 2018.

The Lifter and the Statue of Liberty

When he got the news, Scot Burford could see it as clearly as if somebody handed him an 8 by 11 color photograph.

On January 30,  the Left Coast Lifter, a massive crane originally built by Fluor Construction to help build the new Bay Bridge in San Francisco, steamed past the Statue of Liberty. Excited observers, who saw the crane entering New York Harbor, dubbed it the “The Hudson River Hoister,” honoring its new role in rebuilding the Tappan Zee Bridge over the Hudson River.

Powered by two stout-hearted tug boats, the Lauren Foss and the Iver Foss, it took more than five weeks for the huge crane to complete the 6,000 mile ocean journey from San Francisco to New York via the Panama Canal.

Scot took a deep breath and reflected on all the work needed to plan every aspect of the crane’s complicated journey.

A risk engineer at Liberty International Underwriters (LIU), Burford worked with a specialized team of marine insurance and risk management professionals which included John Phillips, LIU’s Hull Product Line Leader, Sean Dollahon, an LIU Marine underwriter, and Rick Falcinelli, LIU’s Marine Risk Engineering Manager, to complete a detailed analysis of the crane’s proposed route. Based on a multitude of factors, the LIU team confirmed the safety of the route, produced clear guidelines for the tug captains that included weather restrictions, predetermined ports of refuge in the case of bad weather as well as specifying the ballast conditions and rigging of tow gear on the tugs.

Of equal importance, the deep expertise and extensive experience of the LIU team ensured that the most knowledgeable local surveyors and tugboat captains with the best safety records were selected for the project. After all, the most careful of plans will only be as effective as the people who execute them.

The tremendous size of the Left Coast Lifter presented some unique challenges in preparing for its voyage.

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The original intention was to dry tow the crane by loading and securing it on a semi-submersible vessel. However, the lack of an American-flagged vessel that could accommodate the Left Coast Lifter created many logistical complexities and it was decided that the crane would be towed on its own barge.

At first, the LIU team was concerned since the barge was not intended for ocean travel and therefore lacked towing skegs and other structural components typically found on oceangoing barges.

But a detailed review of the plan with the client and contractors gave the LIU team confidence. In this instance, the sheer weight and size of the crane provided sufficient stability, and with the addition of a second tug on the barge’s stern, the LIU team, with its knowledge of barges and tugs, was confident the configuration was seaworthy and the barge would travel in a straight line. The team approved the plan and the crane began its successful voyage.

As impressive as the crane and its voyage were, it was just one piece in hundreds that needed to be underwritten and put in place for the Tappan Zee Bridge project to come off.

Time-Sensitive Quote

SponsoredContent_LIUThe rebuilding of the Tappan Zee Bridge, due to be completed in 2018, is the largest bridge construction project in the modern history of New York. The bridge is 3.1 miles long and will cost more than $3 billion to construct. The twin-span, cable-stayed bridge will be anchored to four mid-river towers.

When veteran contractors American Bridge, Fluor Corp., Granite Construction Northeast and Traylor Bros. formed a joint venture and won the contract to rebuild the Tappan Zee, one of the first things the consortium needed to do was find an insurance partner with the right coverages and technical expertise.

The Marsh broker, Ali Rizvi, Senior Vice President, working with the consortium, was well known to the LIU underwriting and engineering teams. In addition, Burford and the broker had worked on many projects in the past and had a strong relationship. These existing relationships were vital in facilitating efficient communication and data gathering, particularly given the scope and complexity of a project like the Tappan Zee.

And the scope of the project was indeed immense – more than 200 vessels, coming from all over the United States, would be moving construction equipment up the Hudson River.

An integrated team of LIU underwriters and risk engineers (including Burford, Phillips, Dollahon and Falcinelli) got to work evaluating the risk and the proper controls that the project required. Given the global scope of the project, the team’s ability to tap into their tight-knit global network of fellow LIU marine underwriters and engineers with deep industry relationships and expertise was invaluable.

In addition to the large number of vessels, the underwriting process was further complicated by many aspects of the project still being finalized.

“Because the consortium had just won this account, they were still working on contracts and contractors to finalize the deal and were unsure as to where most of the equipment and materials would be coming from,” Burford said.

Despite the massive size of the project and large number of stakeholders, LIU quickly turned around a quote involving three lines of marine coverage, Marine Liability, Project Cargo and Marine Hull & Machinery.

How could LIU produce such a complicated quote in a short period of time? It comes down to integrating risk engineers into the underwriting process, possessing deep industry experience on a global scale and having strong relationships that facilitate communication and trust.

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Photo Credit: New York State Thruway Authority

When completed in 2018, the Tappan Zee will be eight lanes, with four emergency pullover lanes. Commuters sailing across it in their sedans and SUVs might appreciate the view of the Hudson, but they might never grasp the complexity of insuring three marine lines, covering the movements of hundreds of marine vessels carrying very expensive cargo.

Not to mention ferrying a 3,920-ton crane from coast to coast without a hitch.

But that’s what insurance does, in its quiet profundity.

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This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty International Underwriters. The editorial staff of Risk & Insurance had no role in its preparation.




LIU is part of the Global Specialty Division of Liberty Mutual Insurance.
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