Four Loko Makers Denied Coverage
The makers of Four Loko alcoholic beverages were sued by families of individuals who died after ingesting the high-alcohol beverages in accidents or by acute alcohol poisoning.
Phusion, the manufacturer of the drinks, was insured by Selective Insurance Co. of South Carolina, whose policy had a liquor liability exclusion.
In 2013, Phusion filed a complaint against Selective in the Circuit Court of Cook County, Ill., saying the insurer had a duty to defend and indemnify it. Selective declined, citing the exclusion, and filed a motion to dismiss the complaint.
In its lawsuit, Phusion argued the underlying lawsuits were not excluded because the allegations “were not [solely] based on liquor liability, but were based on ‘stimulant liability.’ ” Four Loko beverages include caffeine, guarana and taurine, it said, arguing that the stimulants “operated to desensitize the consumers of Four Loko to the symptoms of intoxication and caused them to act recklessly.”
On Dec. 16, 2014, the circuit court granted Selective’s motion to dismiss. It ruled the “plain language of the liquor liability exclusion precluded coverage.”
That decision was upheld on Dec. 18, 2015, on appeal by Phusion to the 5th District Illinois Appellate Court. The appeals court agreed with a previous U.S. 7th Circuit Court of Appeals ruling in another case that held that Phusion’s arguments were an effort to “disguise the role that intoxication allegedly played in the underlying cases.”
Scorecard: Selective does not have to defend or indemnify Phusion.
Takeaway: For the insured to succeed, it would have had to prove that the allegations were “divorced from the serving of alcohol.”
Court: Hailstorm Damage Needs Proof
On June 21, 2011, vincent and peggy stagliano submitted a claim to the Cincinnati Insurance Co. and the Cincinnati Casualty Co. for damage from a May 24, 2011 hailstorm on one of 48 properties in Dallas that were insured.
That claim was paid, but claims later submitted by the pair claiming damage at other properties from the same hailstorm were denied. The Staglianos sued the insurers claiming breach of contract, among other allegations.
The insurance companies argued there was no evidence that the damage was caused by a hailstorm within the policy period. The insurers’ property claims manager stated the damage was from multiple storms, and could have occurred subsequent to policy expiration.
The district court concluded that the Staglianos’ expert witness, who said the damage occurred during the policy period, was not reliable. It dismissed the case.
The U.S. 5th Circuit Court of Appeals agreed on Dec. 11, 2015. Texas law, it said, requires clear proof that claimed losses occur within the policy period.
Scorecard: The insurance companies do not need to pay the claims.
Takeaway: The insured has the burden to offer proof that the claimed losses occurred during the policy period.
‘Hot Yoga’ Founder Gets Defense
In a lawsuit filed on June 13, 2013 in the U.S. District Court for the Central District of California, lawyer Minakshi Jafa-Bodden said she was forced to resign on March 1, 2013 to stop her investigations into a student’s rape allegation against Bikram Choudhury, the founder of “hot yoga.”
She also accused Choudhury of making offensive sexual gestures and leering at female staffers, among other allegations.
Choudhury sought defense and indemnification from Nationwide Insurance Company, which provided a directors and officers policy to USA Yoga, an organization run by Choudhury’s wife; and from Philadelphia Indemnity Insurance Co., which issued a commercial general liability policy to Choudhury and Bikram’s Yoga College of India.
Both insurers declined to provide defense or indemnification.
In a Dec. 9, 2015 ruling, the court decided that Philadelphia had a duty to defend. A day earlier, it ruled Nationwide did not.
The Philadelphia CGL policy covered personal and advertising injury that included “publication, in any manner, of material that slanders or libels a person or … disparages a person’s or organization’s goods, products or services.”
Jafa-Bodden’s allegations that Choudhury accused her of incompetence and engaged in improper and unethical sexual conduct fall within that coverage, the court ruled.
It ruled that an employment-related-practices exclusion did not apply because evidence indicated Jafa-Bodden was employed by the Indian law firm of Fox Mandal, which dispatched her to work for Choudhury, instructed him on her compensation, and continued to advise her on actions related to Choudhury’s legal affairs.
Since there was a dispute about her employment and thus, a potential for coverage, Philadelphia had a duty to defend, the court ruled.
Nationwide’s policy covered USA Yoga employees and volunteers for acts “in the discharge of their duties solely in [that] capacity.” The court ruled that Choudhury denied being an employee and other evidence concurred.
While Choudhury volunteered at competitions put on by USA Yoga, there is no evidence that Jafa-Bodden was ever at any of those events. In addition, his appearances were also on behalf of other organizations, so he was not acting “solely” as a volunteer for USA Yoga, and was not entitled to a defense from Nationwide.
Scorecard: Philadelphia Indemnity Insurance Co. must defend Bikram Choudhury in the lawsuit.
Takeaway: An insurer may rely on an exclusion to deny coverage only if it provides conclusive evidence that the exclusion applies.
A Call for Truth in Labeling
This past December, the California State Supreme Court overruled two lower court decisions and allowed a class action suit to move forward in state court against Herb Thyme Farms, accused of labeling a mixture of organically grown and conventionally grown fresh herbs as “fresh organic.”
While the case has yet to go before a jury, some see the court’s decision to permit the trial as opening the door to a wave of litigation in state courts for violations of what previously was perceived as a strictly federal regulatory framework.
At the heart of the court’s decision — and the dilemma facing insurers — is the question of intent. Herb Thyme Farms is arguing that the salient issue in the case is an interpretation of federal organic standards, and any deviation on their part is tantamount to misinterpretation.
Plaintiff Michelle Quesada argues that Herb Thyme Farms knowingly mislabeled their products, in violation of California’s Consumers Legal Remedies Act, unfair competition law, and false advertising law. The State Supreme Court ruled Quesada’s accusations deserve a hearing.
Herb Thyme Farms also argued that allowing suits in state courts would weaken the federal standards, but the court specifically negated that as well, stating, “State lawsuits alleging intentional organic mislabeling promote, rather than hinder, Congress’s purposes and objectives.”
“This is a consumer fraud case. The damages that plaintiffs seek are usually for alleged price differentials, or even the price of the product itself. They are not for physical harm,” said attorney Alan Lyons, a partner at Herrick, Feinstein LLP and co-chair of the firm’s Insurance and Reinsurance Group.
“The impact of the case is the court decisions. If the case is ultimately thrown out on the merits by a court decision, it could be helpful to mitigate the impact of this decision.
“The food companies have been asking the courts to pre-empt state law consumer fraud claims in favor of federal law. So, decisions that permit state law cases to move forward build a body of law that is not helpful for companies that are seeking a uniform body of federal law,” said Lyons.
Glenn Drees, managing director of food and agribusiness at Arthur J. Gallagher & Co., thinks that while individual damages may be low, the classes involved could be quite large.
“There are two routes that these things generally take. One is injunctive relief, so ‘quit using that label’ would be the relief that they seek.
“And then the other is for damages, and that’s a wide open space that could be damages to everybody that’s bought the product … and the number could be a fairly large number. … I have to believe that is their intent now that the court said, ‘Yes, you can go ahead and sue them,’ ” said Drees.
David McNeil, principal at Edgewood Partners Insurance Center, thinks the impact will be more limited, and that instances of mislabeling — or intentional mislabeling — are extremely rare.
“It’s not worth it … whatever that little marginal short-term benefit would be, the long-term effects are so negative … [The food and beverage industry is] smarter than that.”
But if suits in state courts begin to weaken the federal standard, McNeil could see that changing.
“I do think you would have increased liability, substantial liability if you do start to have different states setting different standards,” he said.
That question of intent is important to insurers as well, because it goes to the heart of insurability.
“If they did it with intent, then it’s illegal and a non-insurable event. If it was done by accident … then it is going to be a covered event,” said McNeil.
It appears that the court is allowing the case go to a jury in part to determine that intentionality. But until such a determination is made, the insurers are on the hook for legal expenses.
“So you are going to have some initial coverage, initial legal defense, but as soon as that determination is done there will be a resolution of rights straightaway, and as soon as that determination is made they will stop,” said McNeil.
But while costs in each case may be limited by exclusions, those initial legal expenses can add up quickly if there are numerous civil actions.
“The Quesada decision may prompt a significant increase in consumer class action lawsuits alleging state law fraud and misrepresentation against businesses that use the ‘organic’ label,” Lyons said.
If they did it with intent, then it’s illegal and a non-insurable event. — David McNeil, EPIC Insurance Brokers
“Although fraud claims are typically excluded from insurance policies, there is usually coverage for defense costs until a final adjudication of fraud is issued by a court, by which time hundreds of thousands, or even millions, of dollars may have been incurred in defense costs,” said Lyons.
“As a result, insurers may seek to increase premiums to address the potential increased exposure to ‘organic’ lawsuits against insureds,” Lyons added.
Insurers may also “seek to tighten up the language of their fraud exclusions so as to more clearly and expressly avoid a duty to indemnify for a finding of fraudulent mislabeling,” he said.
Seek Out Coverage Options
Drees advises insureds to explore additional policies as well.
“The General Liability policy doesn’t respond unless there’s an assertion of bodily injury or property damage. There are some other coverages that may come into play such as product recall or product withdrawal coverage, and those policies are less standard so it would behoove a policyholder to determine whether improper labeling is a covered cause or loss,” said Drees.
He sees the possibility of a much broader impact, even if a jury ultimately sides with Herb Thyme Farms.
“Everybody consumes food, and labels are important. We’re more concerned now about what we put in our bodies than we were 10 years ago. So it seems to me it’s just an area that’s rich in opportunity for legal action,” he said.
“The problem is, in my opinion, there’s just not enough inspectors,there’s not enough enforcement people to get to all the places … so the void is being filled by lawsuits.”
But despite a potential increase in liability, double-digit growth in organic sales means companies will be unlikely to move away from such labeling.
“There’s always this constant interplay between the sales and marketing guys and the corporate attorneys. The sales guys want to say, ‘This is the greatest product that there ever was,’ and the legal people want to dial it back so they don’t unnecessarily invite litigation,” said Drees.
Litigation like Quesada may actually foster growth.
“I don’t think it’ll damage the sales growth. In fact, it could have the opposite effect and actually help growth, because consumers might be more confident that what they’re buying truly is organic; and that there are consequences for people that try and pass something off as organic that isn’t,” said Drees.
Searching for Stability in Cyber Space
As headline-grabbing breaches crack systems and tarnish reputations of major retail, healthcare and financial companies, the need for cyber insurance has become increasingly apparent.
Given the constantly changing nature of cyber risk and the market landscape, creating a stable, sustainable cyber insurance business demands a prudent approach, with an eye on the long road.
“We’ve seen carriers jump in and out, wanting to take advantage of a new opportunity, but perhaps underestimating the risk,” said Danielle Librizzi, Senior Vice President, Head of Professional Liability, Berkshire Hathaway Specialty Insurance (BHSI).
“As cyber exposure became more tangible to carriers, in-force coverage was tested and many made radical changes to pricing and availability of coverage. BHSI is committed to entering the cyber market in a thoughtful and sustainable way. We want to be there for our customers as the risks continue to evolve.”
Diverse, Evolving Risks
Cyber exposure – and coverage — have been evolving, posing different risks and underwriting challenges for different industries. The technology, financial services and healthcare industries illustrate the diverse issues that must be considered in order to provide effective, financially sustainable cyber solutions.
The technology sector was the first cyber battleground, and technology E&O forms included some cyber coverage by virtue of the nature of the risk. “There’s inherent cyber coverage for third party liabilities in E&O,” Librizzi said.
While coverage is widely available, tech companies pose challenges to underwriters because of their unique position in the cyber “supply chain.” These companies provide software, hardware and cloud services; virtually every organization in the world is dependent on a tech provider of some stripe. If an insurer is covering both the provider and its clients, the aggregate risk should be monitored closely.
Think of a DOS attack on a cloud provider that prevents all of its clients – which could include anyone from a bank to a retailer or transportation company — from accessing stored customer or corporate data or running cloud-based service apps. That single attack could bring business in multiple industries to a grinding halt, potentially causing business interruption and E&O losses.
The tech industry hasn’t seen a large scale event like this yet, but it isn’t waiting around for one to strike before addressing the underlying risk. Controlling and accounting for the aggregate exposure will mold the direction that coverage development takes.
“Our combined form, introduced in October, 2015, is a comprehensive solution that includes first and third party cyber coverage as well as traditional E&O coverage,” Librizzi said.
However, that approach may not be appropriate for other industries. Financial Institutions, for example, may seek a dedicated cyber only policy which does not include traditional E&O coverage.
While banks typically have strong protocols for network security and privacy, they also have a much greater exposure in massive stores of customer data. Financial Institutions are looking to address liability in the form of class action lawsuits or heavy regulatory investigations and fines emanating from cyber, and may not want to compromise their traditional E&O limits.
“Additionally, given the increased reliance on outsourced providers for technology solutions, we have started to see the introduction of sub-limited coverage for dependent business interruption and payment card industry (PCI) fines and assessments as enhancements to coverage,” Librizzi said. “We might see those sub-limits go to full coverage as competition gets heavier.”
Other industries, which may not be as advanced as financial institutions in addressing cyber threats, have suffered more from a lack of robust cyber coverage that can keep up with increasing exposure.
Healthcare, for example, has seen a surge of cyber attacks since hospitals and other health systems went electronic. To a hacker, healthcare providers represent a warehouse of valuable personal identifiable and protected health information.
Email addresses from healthcare systems typically are white-listed and less likely to get caught in a spam filter, giving hackers incentive to obtain access and gain control of a healthcare provider’s network in order to launch phishing attacks.
After some high-profile breaches in 2015, Human Health Services and the Office for Civil Rights came under scrutiny for not doing enough enforcement of HIPPA. Fines imposed by regulators increased dramatically over the past decade, and seem poised to only get higher.
“They’ll be ramping up enforcement of regulations in 2016, and that’s only a peek of what’s on the horizon,” Librizzi said.
The burgeoning of healthcare’s cyber exposure has challenged the insurance industry to better understand the nature of the risk and how best to secure hospital systems. Coverage for this sector remains the most difficult to write effectively.
BHSI understands the need for different customers to have different solutions. Some customers desire a dedicated cyber policy that does not include traditional E&O coverage. BHSI’s Network Security and Privacy stand-alone policy is designed to address the needs to those customers.
“The cyber exposures and coverages needs of healthcare, financial services and technology are on different timelines and will look very different in the future,” Librizzi said.
Even in more mature markets, the conflation of commercial and personal cyber risk will challenge insurers going forward. Most existing cyber products don’t cover property damage and personal injury; as the risks emerge and the Internet of Things becomes more pervasive, the coverage will have to evolve as well.
“We must always be thinking about what is on the horizon from a risk and coverage perspective – our technology driven society demands it,” Librizzi said.
Anticipating challenges and adapting to each industry’s needs has been a cornerstone of BHSI’s approach to cyber. It’s careful and measured approach has also helped the specialty insurer build an arsenal of experts and ancillary services to help clients better grasp and mitigate their exposure.
“We know the importance of really understanding the risk and communicating it clearly to our customers,” Librizzi said. “We don’t bury our coverage in a pile of definitions, and we provide the expertise to help insureds stay ahead of the next big breach.”
To learn more about BHSI’s professional liability products, visit http://www.bhspecialty.com/.
Berkshire Hathaway Specialty Insurance (www.bhspecialty.com) provides commercial property, casualty, healthcare professional liability, executive and professional lines, surety, travel, programs, medical stop loss and homeowners insurance. The actual and final terms of coverage for all product lines may vary. It underwrites on the paper of Berkshire Hathaway’s National Indemnity group of insurance companies, which hold financial strength ratings of A++ from AM Best and AA+ from Standard & Poor’s. Based in Boston, Berkshire Hathaway Specialty Insurance has offices in Atlanta, Boston, Chicago, Fort Lauderdale, Houston, Los Angeles, New York, San Francisco, San Ramon, Stevens Point, Auckland, Brisbane, Hong Kong, Melbourne, Singapore, Sydney and Toronto. For more information, contact [email protected].
The information contained herein is for general informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product or service. Any description set forth herein does not include all policy terms, conditions and exclusions. Please refer to the actual policy 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 Berkshire Hathaway Specialty Insurance. The editorial staff of Risk & Insurance had no role in its preparation.