Infographic: The Risk List

6 Emerging Catastrophic Liability Risks

Unexpected liabilities create coverage challenges for employers. Presented by Travelers.
By: | March 2, 2015 • 2 min read
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The Law

Legal Spotlight

The latest decisions impacting the industry.
By: | March 2, 2015 • 5 min read
You Be the Judge

Insurer Required to Defend, But Not Indemnify

On July 27, 2005, Alex Sehat, a footwear company employee based in a Kmart store in Hollywood, Fla., helped a Kmart employee get a baby stroller down from a high shelf.

03012015_leag_spotlight_shoesThe stroller fell and struck Judy Patrick, a customer, in the face. She later sued Kmart for negligence, on May 17, 2006, but her counsel ultimately discovered that Sehat was actually an employee of Footstar Inc., which operated footwear departments in Kmart stores.

Footstar contacted Liberty Mutual on June 6, 2007 about the incident, and on Jan. 24, 2008, Kmart formally requested defense and indemnification from the carrier. Two days later, Patrick amended her complaint to include Footstar as a defendant.
Liberty Mutual denied defense and indemnification.

After Kmart settled the litigation with Patrick later that year for $300,000 and $10,000 in Kmart gift cards, the retailer filed suit against Footstar and Liberty Mutual for defense and indemnification. A magistrate judge ruled Liberty Mutual and Footstar owed a duty to defend (as of Jan. 24, 2008, when notice was given) and apportioned Footstar’s fault at 15 percent.

The judge also ruled that the insurer did not act in bad faith by denying coverage and Kmart did not breach the notice provisions of the policy. Kmart appealed.


On Feb. 4, 2015, a three-judge panel on the U.S. 7th Circuit Court of Appeals affirmed the duty to defend, but reversed the indemnification ruling. The opinion cited the “master agreement” under which Footstar operated inside Kmart’s stores. That agreement noted that “any injury had to arise ‘pursuant to’ or ‘under’ the Master Agreement to trigger indemnification, and the Master Agreement explicitly prohibited Sehat’s out-of-department action that resulted in the injury.”

It noted, however, that Sehat’s actions were “potentially covered,” and therefore, the insurer had a duty to defend dating to Jan. 24, 2008, when Kmart made an official request for coverage.

Scorecard: The insurance company was required to provide a defense to the retailer, but did not have to contribute to the $310,000 settlement paid in the case.

Takeaway: Because the Footstar employee violated the scope of the company’s agreement with Kmart, the insurer did not have to indemnify the retailer.

Fraud Negates Coverage

On Dec. 21, 1998, Cigna Corp. revamped its retirement plan, converting its traditional defined-benefit plan to a cash-balance plan.

It assured plan participants that the conversion would not affect benefits accrued as of Dec. 31, 1997 and presented the change as “an enhanced benefit.” In 2001, plan participants filed a class-action lawsuit on behalf of about 27,000 employees, and courts have since ruled that such communications were “downright misleading.”

03012015_leag_spotlight_retireesIn reality, the change reduced or froze benefits or accruals. Such communication violated the rules of the U.S. Employee Retirement Income Security Act, the courts ruled.

In a separate but related action in 2012, Cigna filed suit against two of its professional liability and fiduciary liability insurers, Executive Risk Indemnity and Nutmeg Insurance Co., seeking coverage. Each of the insurers had issued excess policies of $10 million.

The other primary and excess carriers settled separately.

The Court of Common Pleas of Philadelphia County dismissed the lawsuit, which was then appealed by Cigna to the Pennsylvania Superior Court.

The main issue before the higher court was whether the policy’s “deliberately fraudulent acts” exclusion precluded coverage, as the lower court had ruled in dismissing the case.

Cigna contended that the policy would cover its conduct as a “wrongful act,” defined in the policy to include “any actual or alleged … misstatement, misleading statement, act, omission … .” It argued the wrongful act provision negated the fraudulent acts exclusion.


On Feb. 3, 2015, the state Superior Court disagreed, ruling that the “plain meaning” of the policy in its entirety is contrary to that argument. In addition, the company’s conduct “would clearly qualify as fraudulent under Pennsylvania law,” which requires as a matter of public policy that insurance coverage not be provided for fraudulent acts.

Scorecard: The insurance companies are not required to indemnify the company up to the $20 million total excess coverage.

Takeaway: Fraudulent activity bars insurance coverage.

Insurer vs. Insurer

On Aug. 15, 2010, before an International Kart Federation race event at the Grand Junction Motor Speedway in Colorado, a 9-year-old go-karter was killed during a practice event when his go-kart collided with a maintenance/recovery vehicle.

03012015_leag_spotlight_racerThe parents sued the Speedway, its employees, the International Kart Federation (which was the sanctioning body for the race event) and others in state court. Mt. Hawley Insurance Co. defended IKF as its insured, and Speedway and its employees as additional insureds.

On June 24, 2013, Mt. Hawley filed suit against National Casualty Co., which provided commercial general liability coverage to members of the National Karting Alliance (NKA). Speedway was a member of the NKA.

The policy covered bodily injury, property damage and personal and advertising injury liability “caused, in whole or in part, by your acts or omissions or the acts or omissions of those acting on your behalf … .”

National Casualty denied coverage, saying the Speedway and its employees did not qualify as additional insureds under the NKA policy. In court, it sought a summary judgment.


The U.S. District Court for the District of Colorado ruled that a summary judgment was warranted, basing its decision on the key term of “acting on your behalf” found in the policy. It cited case law that determined that coverage was not available when a member’s acts are “for his own private actions done for his own pleasure” or “completely personal and voluntary” actions.

“Although Speedway had liability insurance through NKA’s policy, Speedway acted voluntarily and for its own benefit on the day of the accident and not at the direction, request, or benefit of NKA,” the court ruled on Jan. 30, 2015.

Scorecard: National Casualty Co. did not have to contribute a pro rata share of Mt. Hawley’s defense costs incurred on behalf of Speedway.

Takeaway: Merely being a member of an organization will not trigger the organization’s insurance coverage.

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

What Is Insurance Innovation?

When it comes to E&S insurance, innovation is best defined as equal parts creativity and speed.
By: | March 2, 2015 • 4 min read

SponsoredContent_LexingtonTruly innovative insurance solutions are delivered in real time, as the needs of businesses change and the nature of risk evolves.

Lexington Insurance exemplifies this approach to innovation. Creative products driven by speed to market are at the core of the insurer’s culture, reputation and strategic direction, according to Matthew Power, executive vice president and head of strategic development at Lexington, an AIG Company and the leading U.S.-based surplus lines insurer.

“The excess and surplus lines sector is in a growth mode due, in no small part, to the speed at which our insureds’ underlying business models are changing,” Power said. “Tomorrow’s winning companies are those being built upon true breakthrough innovation, with a strong focus on agility and speed to market.”

To boost its innovation potential, for example, Lexington has launched a new crowdsourcing strategy. The company’s “Innovation Boot Camps” bring people together from the U.S., Canada, Bermuda and London in a series of engagements focused on identifying potential waves of change and market needs on the coverage horizon.

“Employees work in teams to determine how insurance can play a vital role in increasing the success odds of new markets and customers,” Power said. “That means anticipating needs and quickly delivering programs to meet them.”

An example: Working in tandem with the AIG Science team – another collaboration focused on innovation – Lexington is looking to offer an advanced high-tech seating system in the truck cabs of some of its long-haul trucking customers. The goal is to reduce driver injury and fatigue-based accidents.

SponsoredContent_Lexington“Our professionals serving the healthcare market average more than twenty years of industry experience. That includes attorneys and clinicians combining in a defense-oriented claims approach and collaborating with insureds in this fast-moving market segment. At Lexington, our relentless focus on innovation enables us to take on the risk so our clients can take on the opportunities.”
— Matthew Power, Executive Vice President and Head of Regional Development, Lexington Insurance Company

Power explained that exciting growth areas such as robotics, nanotechnology and driverless cars, among others, require highly customized commercial insurance solutions that often can be delivered only by excess and surplus lines underwriters.

“Being non-admitted, our freedom of rate and form allows us to be nimble, and that’s very important to our clients,” he said. “We have an established track record of reacting quickly to trends and market needs.”

Lexington is a leading provider of personal lines coverage for the excess and surplus lines industry and, as Power explains, the company’s suite of product offerings has continued to evolve in the wake of changing customer needs. “Our personal lines team has developed a robust product offering that considers issues like sustainable building, energy efficiency, and cyber liability.”

Most recently the company launched Evacuation Response, a specialty coverage designed to reimburse Lexington personal lines customers for costs associated with government mandated evacuations. “These evacuation scenarios have becoming increasingly commonplace in the wake of recent extreme weather events, and this coverage protects insured families against the associated costs of transportation and temporary housing.

The company also has followed the emerging cap and trade legislation in California, which has created an active carbon trading market throughout the state. “Our new Carbon ODS product provides real property protection for sequestered ozone depleting substances, while our CarbonCover Design Confirm product insures those engineering firms actively verifying and valuing active trades.” Lexington has also begun to insure new Carbon Registries as they are established in markets across the country.

Lexington has also developed a number of new product offerings within the Healthcare space. The Affordable Care Act has brought an increased focus on the continuum of care and clinical patient safety. In response, Lexington has created special programs for a wide range of entities, as the fast-changing healthcare industry includes a range of specialized services, including home healthcare, imaging centers (X-ray, MRI, PET–CT scans), EMT/ambulances, medical laboratories, outpatient primary care/urgent care centers, ambulatory surgery centers and Medical rehabilitation facilities.

“The excess and surplus lines sector is in growth mode due, in no small part, to the speed at which our insureds’ underlying business models are changing,” Power said.

Apart from its coverage flexibility, Lexington offers this segment monthly webcasts, bi-monthly conference calls and newsletters on key risk issues and educational topics. It also provides on-site risk consultation (for qualifying accounts), access to RiskTool, Lexington’s web-based healthcare risk management and patient safety resource, and a technical staff consisting of more than 60 members dedicated solely to healthcare-related claims.

“Our professionals serving the healthcare market average more than twenty years of industry experience,” Power said. “That includes attorneys and clinicians combining in a defense-oriented claims approach and collaborating with insureds in this fast-moving market segment.”

Power concluded, “At Lexington, our relentless focus on innovation enables us to take on the risk so our clients can take on the opportunities.”

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

Lexington Insurance Company, an AIG Company, is the leading U.S.-based surplus lines insurer.
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