Court Sinks Subrogation
On March 17, 2012, the commander, a vessel owned by Nature’s Way Marine, ran aground in the mouth of a narrow channel of the Mississippi River near Crown Point, La., owned and operated by Crown Point Holdings LLC.
As it maneuvered to free itself, the movements created “extreme wave wash” that broke the mooring lines of two of Crown Point’s vessels, the Port Gibson and the Buccaneer, grounding them on a mud bank.
On March 21, the Port Gibson began to take on water and sank, pulling the Buccaneer down with it. After raising the ships, it was discovered Port Gibson’s hull was punctured by a bolt-studded piece of timber.
Osprey Underwriting Agency Ltd., which issued Crown Point marine hull insurance on the Port Gibson and the Buccaneer, paid for salvage and damage expenses and then, as subrogee, it sued Nature’s Way for reimbursement, arguing the Commander’s maneuvers caused the sinking of Crown Point’s vessels.
A district court in Louisiana ruled against Osprey. It said Osprey failed to prove the Commander’s actions caused the sinking, and even if the causation could be determined, Crown Point’s failure to warn anyone of the timber impaled in the hull was a superseding cause of the sinking.
On March 25, the U.S. 5th Circuit Court of Appeals upheld that decision. It concluded that experts from both sides “vehemently” disagreed with how the hull impalement occurred, and that marine law required negligence to be a “substantial factor” in the damage.
Scorecard: Osprey will not be reimbursed for its costs to salvage and repair the vessels.
Takeaway: Under general maritime law, “negligence must be a ‘substantial factor’ in the injury.”
Legal Fees Contested
On Dec. 29, 2011, William R. Kowalski and Hawaii International Seafood filed suit against Anova Food LLC, claiming patent infringement and false advertising. The lawsuit accused Anova of using Kowalski’s “tasteless smoke” process to treat tuna, although Anova advertised the fish were treated by a “clearsmoke” process.
Anova retained Gary Grimmer as local counsel in Hawaii to represent it.
On Oct. 12, 2012, Anova requested a defense from the Hanover Insurance Co. and its subsidiary, Massachusetts Bay Insurance Co. (“Hanover”). Defense was granted under a reservation of rights, and the insurer agreed to pay Grimmer in accordance with its litigation guidelines and fees.
Hanover’s claim that it only agreed to hire Grimmer and not Zobrist conflicted with its payment of some of Zobrist’s legal fees, the court ruled.
Hanover stated it would not pay, however, for any fees paid by Anova prior to the claim being made.
The insurer said it would not apply the exclusion for injuries “arising out of” infringement of intellectual property, but would not indemnify Anova for any punitive damages.
On Dec. 11, 2012, the Zobrist law firm, which had a history with Anova’s intellectual property issues, filed its appearance as counsel of record for Anova, and was subsequently paid $284,624 by Hanover.
A year later, Hanover informed Anova it was transferring defense in the case from Grimmer to two other attorneys. At that time, it said that any continued involvement by Zobrist “will need to be funded directly” by Anova.
On June 19, 2014, Hanover asked for a court determination that it need not defend nor indemnify Anova. The insured filed a counterclaim for breach of contract and bad faith, arguing Hanover owed it a defense, and the unpaid balance to Zobrist of $385,153.
Anova reached a settlement with Kowalski in April 2015.
The U.S. District Court for the District of Hawaii ruled on March 24, 2016 that Hanover did have a duty to defend Anova but did not have to pay for legal services prior to Anova’s request for a defense.
Because factual questions remained about the legal fees paid to Zobrist, the court denied Anova’s motion for summary judgment on its claim that Hanover breached its contract.
Scorecard: Additional court proceedings will determine whether Hanover must pay $385,153 for Zobrist’s legal fees.
Takeaway: Hanover’s claim that it only agreed to hire Grimmer and not Zobrist conflicted with its payment of some of Zobrist’s legal fees, the court ruled.
Request for Defense Denied
In 2009, Larry Naquin was using a land crane owned by Elevating Boats LLC (EBI) to move a “test block” when the welding holding the crane to its base failed.
Naquin jumped from the crane house, breaking both feet and sustaining a lower abdominal hernia. He was never able to return to physical work.
In May 2012, a federal jury in Louisiana awarded Naquin $2.4 million for physical and emotional pain and lost wages. EBI appealed and the negligence verdict was upheld.
Subsequently, EBI sued State National Insurance Co. and London insurers, accusing them of breaching their contracts by denying EBI’s request for defense and indemnification.
On March 22, the U.S. 5th Circuit Court of Appeals agreed with a lower court in dismissing EBI’s lawsuit.
Scorecard: The insurers are not responsible for indemnifying EBI.
Takeaway: EBI’s policy offered indemnity for the company “as owner of the Vessel,” and it was not triggered because the accident occurred on land. &
Out of Control in the Driver’s Seat
You’re tooling down the highway when suddenly your car’s A/C turns on to full blast. Then the radio fires up and switches to a Hip-Hop station.
You’re startled when the wipers turn on, wiper fluid obscuring your view of the road for a moment.
You’re frantically trying to turn it all off when your car loses power completely, leaving you stranded on a busy stretch of road with no shoulder, a semi closing in fast from behind you.
That sounds a little a scene from a spy thriller or maybe even the “X-Files,” but it happened to the driver of a 2014 Jeep Cherokee as researchers Charlie Miller and Chris Valasek hacked into and took control of it.
The duo found a way to hack in wirelessly, exploiting a widely used onboard entertainment system to take over a vehicle’s dashboard functions, brakes, steering and transmission.
Miller and Valasek first made headlines in 2013, when they publicized their success hacking into Ford and Toyota models. At that time, they only managed to accomplish the attacks while their PC was plugged into the vehicles’ diagnostic ports.
Only two years later, the duo found a way to hack in wirelessly, exploiting a widely used onboard entertainment system to take over a vehicle’s dashboard functions, brakes, steering and transmission.
They found they could do it from absolutely anywhere, so long as they had an internet connection. Most disturbing of all, they identified a loophole that could be used to attack multiple cars at once — creating a wirelessly controlled automotive botnet encompassing hundreds of thousands of vehicles.
The team published part of the project online and later demonstrated their “progress” at the 2015 Black Hat conference.
Without question, the more technologically sophisticated and connected vehicles become, the more vulnerable they get.
After Miller and Valasek published their results, Fiat Chrysler issued a recall for 1.4 million vehicles affected by the vulnerability exploited by the team. The automotive industry has been on high alert ever since, even while they simultaneously boast about models equipped with more and better technology.
Without question, the more technologically sophisticated and connected vehicles become, the more vulnerable they get. The push toward autonomous vehicles will only increase those vulnerabilities.
“We are a long way from securing the non-autonomous vehicles, let alone the autonomous ones,” said Stefan Savage, a computer science professor at the University of California, San Diego, during an Enigma security conference early this year.
Autonomous isn’t necessarily synonymous with “connected,” however, even for early entrants to the commercial autonomous vehicle space.
Daimler’s Freightliner Inspiration, the world’s first road-ready self-driving truck, “doesn’t rely on ‘connectivity’ or wireless communication to/from the outside world to drive itself,” said Dan Holden, manager of corporate risk and insurance for Daimler Trucks North America.
“Rather, the system is self-contained, meaning it uses production cameras and radars as inputs to determine the vehicle position and keep it centered in its lane. Therefore the Inspiration truck is as secure from a cyber perspective as production vehicles today.”
More Frightening Than Fiction
Until cyber vulnerabilities can be addressed, it doesn’t take a broad stretch of the imagination to see what the future implications could be for this type of attack. Consider a few scenarios:
- The vehicle of a courier transporting sensitive documents is disabled in a remote location, where armed thieves are waiting to steal the documents.
- A high-level executive receives a message alerting him that ransomers have control of his teen daughter’s car — with her in it — and will drive it off of a bridge if he doesn’t pay $10 million in Bitcoin.
- A ring of thieves finds a way into the systems of a trucking fleet’s rigs through its onboard camera system, enabling it to stop the trucks remotely so teams can hijack the cargo.
- An extreme hactivist group decides to “brick” every car in Los Angeles, disrupting businesses and lives until its demands are met.
- An attacker hacking into a commercial truck’s system disables the brakes, sending the truck careening into a school bus in the middle of an intersection.
Keep in mind that even less extreme types of hacking could create vulnerabilities for both individuals and businesses.
Miller and Valasek proved their ability to wirelessly hack a vehicle for surveillance, tracking GPS coordinates, measuring speed, and tracing routes. When a vehicle’s onboard systems are connected to the driver’s smartphone, the smartphone is also at risk for attack, and any data stored in it is fair game, including passwords and credit card information.
Government and Industry Respond
Miller and Valasek’s work is part of what inspired the drafting of an automotive security bill introduced last year. The Security and Privacy In Your Car Act (the SPY Car Act) would require cars sold in the U.S. to meet certain standards of protection against digital attacks and privacy.
The bill’s creators surveyed 20 carmakers and discovered that only seven used independent security testing to check their vehicles’ security, and only two had tools in place to stop a hacker intrusion.
Several Japanese companies are working on automotive cyber security technology.
In March, the FBI, along with the Department of Transportation and the National Highway Traffic and Safety Administration, published an advisory on the realities of hackable vehicles and making recommendations to increase security.
Several Japanese companies are working on automotive cyber security technology. Panasonic is developing a device that can detect unauthorized network signals and cancel them out. Fujitsu Laboratories and a researcher from Yokohama National University are developing technology that detect an attack, notify the driver, and encrypt signals to allow the vehicle to be stopped safely.
However these technologies are still five years away from commercial availability, as are fully encrypted next-generation automotive networks.
Transportation companies, their clients and every organization with a fleet of its own should be asking questions about the security of the vehicles that are used in the course of their daily operations — and whether they have cover that will respond if their vehicles fall prey to cyber tampering.
“Having insurance coverage in place that would address bodily injury and property damage is something companies should seriously consider as this risk matures,” said William A. Boeck, senior vice president. and insurance and claims counsel for Lockton’s cyber risk practice.
Helping Investment Advisers Hurdle New “Customer First” Government Regulation
This spring, the Department of Labor (DOL) rolled out a set of rule changes likely to raise issues for advisers managing their customers’ retirement investment accounts. In an already challenging compliance environment, the new regulation will push financial advisory firms to adapt their business models to adhere to a higher standard while staying profitable.
The new proposal mandates a fiduciary standard that requires advisers to place a client’s best interests before their own when recommending investments, rather than adhering to a more lenient suitability standard. In addition to increasing compliance costs, this standard also ups the liability risk for advisers.
The rule changes will also disrupt the traditional broker-dealer model by pressuring firms to do away with commissions and move instead to fee-based compensation. Fee-based models remove the incentive to recommend high-cost investments to clients when less expensive, comparable options exist.
“Broker-dealers currently follow a sales distribution model, and the concern driving this shift in compensation structure is that IRAs have been suffering because of the commission factor,” said Richard Haran, who oversees the Financial Institutions book of business for Liberty International Underwriters. “Overall, the fiduciary standard is more difficult to comply with than a suitability standard, and the fee-based model could make it harder to do so in an economical way. Broker dealers may have to change the way they do business.”
As a consequence of the new DOL regulation, the Securities and Exchange Commission (SEC) will be forced to respond with its own fiduciary standard which will tighten up their regulations to even the playing field and create consistency for customers seeking investment management.
Because the SEC relies on securities law while the DOL takes guidance from ERISA, there will undoubtedly be nuances between the two new standards, creating compliance confusion for both Registered Investment Advisors (RIAs)and broker-dealers.
To ensure they adhere to the new structure, “we could see more broker-dealers become RIAs or get dually registered, since advisers already follow a fee-based compensation model,” Haran said. “The result is that there will be likely more RIAs after the regulation passes.”
But RIAs have their own set of challenges awaiting them. The SEC announced it would beef up oversight of investment advisors with more frequent examinations, which historically were few and far between.
“Examiners will focus on individual investments deemed very risky,” said Melanie Rivera, Financial Institutions Underwriter for LIU. “They’ll also be looking more closely at cyber security, as RIAs control private customer information like Social Security numbers and account numbers.”
Demand for Cover
In the face of regulatory uncertainty and increased scrutiny from the SEC, investment managers will need to be sure they have coverage to safeguard them from any oversight or failure to comply exactly with the new standards.
In collaboration with claims experts, underwriters, legal counsel and outside brokers, Liberty International Underwriters revamped older forms for investment adviser professional liability and condensed them into a single form that addresses emerging compliance needs.
The new form for investment management solutions pulls together seven coverages:
- Investment Adviser E&O, including a cyber sub-limit
- Investment Advisers D&O
- Mutual Funds D&O and E&O
- Hedge Fund D&O and E&O
- Employment Practices Liability
- Fiduciary Liability
- Service Providers D&O
“A comprehensive solution, like the revamped form provides, will help advisers navigate the new regulatory environment,” Rivera said. “It’s a one-stop shop, allowing clients to bind coverage more efficiently and provide peace of mind.”
Ahead of the Curve
The new form demonstrates how LIU’s best-in class expertise lends itself to the collaborative and innovative approach necessary to anticipate trends and address emerging needs in the marketplace.
“Seeing the pending regulation, we worked internally to assess what the effect would be on our adviser clients, and how we could respond to make the transition as easy as possible,” Haran said. “We believe the new form will not only meet the increased demand for coverage, but actually creates a better product with the introduction of cyber sublimits, which are built into the investment adviser E&O policy.”
The combined form also considers another potential need: cost of correction coverage. Complying with a fiduciary standard could increase the need for this type of cover, which is not currently offered on a consistent basis. LIU’s form will offer cost of correction coverage on a sublimited basis by endorsement.
“We’ve tried to cross product lines and not stay siloed,” Haran said. “Our clients are facing new risks, in a new regulatory environment, and they need a tailored approach. LIU’s history of collaboration and innovation demonstrates that we can provide unique solutions to meet their needs.”
For more information about Liberty International Underwriters’ products for investment managers, visit www.LIU-USA.com.
Liberty International Underwriters is the marketing name for the broker-distributed specialty lines business operations of Liberty Mutual Insurance. Certain coverage may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds. This literature is a summary only and does not include all terms, conditions, or exclusions of the coverage described. Please refer to the actual policy issued for complete details of coverage and exclusions.
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.