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.
Buyers Beware: General Liability Outlook May be Shifting
The soothing drumbeat of “excess capital” and “soft market” to describe the general liability (GL) market is a familiar sound for brokers and buyers. Emerging GL trends, however, suggest the calm may not last.
Increasing severity of GL claims may hit some sectors like a light rain at first, if they have not already, but they could quickly feel like a pelting thunderstorm in others. A number of factors could contribute to the potential jump in GL prices for certain industry segments or exposures, possibly creating “micro” or niche hard markets in the short-term, and maybe even turning the broader market over the longer-term.
“There are trends we’re seeing that will play out slowly. Industries that carry more general liability exposure will and have been hit first and hardest, but it won’t apply across the board initially,” said David Perez, Senior Vice President and Chief Underwriting Officer, for Liberty Mutual Insurance’s National Insurance Specialty operation. “There is ample capital in the market today, which allows a poor performing account to move its policy frequently from carrier to carrier. Poorer performing classes, however, will likely face increased pricing for GL policies and a reduction in capacity.”
The good news for buyers is that they can take action today to lessen the impact these trends and the evolving market may have on their GL programs.
David Perez on the state of the GL market.
Medical and Litigation Trends Drive Severity
One factor increasing claim severity is the rising cost of health care, driven both by greater demand and by medical inflation that is growing faster than the Consumer Price index.
The impact of rising medical costs on commercial auto is well-known. Businesses with heavy transportation exposures are finding it more difficult to obtain coverage, or are paying more for it.
That same trend will impact general liability, just on a slower and more fragmented basis.
“In light of these trends, brokers and buyers should seek to understand how effectively their current or potential insurers defend GL claims, particular in using evidence-based medicine to assess and value the medical portion of a claim, and how they can provide necessary care to claimants while still helping clients control their total cost of risk.”
— David Perez, Senior Vice President & Chief Underwriting Officer, National Insurance Specialty, Liberty Mutual Insurance
“It takes longer for medical inflation to register through the tort system in general liability than it does in auto liability (AL) because auto claims are generally resolved more quickly,” Perez said. “But the same factors affecting severity in AL also exist in GL and as a result, it’s foreseeable that we will not only see similar severity trends in GL, but they may in fact be worse than we’ve seen in commercial auto.”
Industries with greater exposure to severity in general liability claims should be the first wave of companies to notice the impact of medical inflation.
“Medical inflation will drive up costs across the board, but sectors like construction and product manufacturing have a higher relative exposure for personal injury lawsuits.”
The impact of medical inflation on the GL market.
Beyond medical inflation, two litigation trends are increasing GL damages. First, plaintiffs’ lawyers are seeking to migrate the use of life care plans—traditionally employed only for truly catastrophic injuries—to more routine claims. Perez recalled one claimant with a broken thumb and torn ligaments who sought as much as $1 million in care for the injury for the rest of his life.
Second, the number of allegations of traumatic brain injuries (TBI) in GL claims is growing. It can be difficult to predict TBI outcomes initially and poor outcomes can be expensive and long tailed.
“In light of these trends, brokers and buyers should seek to understand how effectively their current or potential insurers defend GL claims, particular in using evidence-based medicine to assess and value the medical portion of a claim, and how they can provide necessary care to claimants while still helping clients control their total cost of risk,” notes Perez.
Changing Legal Landscape
Medical inflation and litigation trends are not the only issues impacting general liability.
Unanticipated changes in court interpretations of policy language can throw unexpected pressure on GL pricing and capacity.
Courts sometimes issue rulings interpreting policy language in a manner that expands coverage well beyond the underwriter’s original intent. Such opinions may sometimes have a retroactive effect, resulting in an immediate impact on not only open, but also closed cases in some circumstances.
Shifts in the Marketplace
In addition to facing price increases, GL brokers and buyers will be challenged by slightly shrinking capacity due to consolidation and repositioning among carriers in the marketplace. “Some major carriers have scaled back their GL writing, resulting in a migration of experienced senior management. As these executives leave, they take their GL expertise and relationships with them, resulting in fewer market leaders and less innovation,” Perez said.
“Additionally, there are new carriers coming into the business that may not have the historical GL loss data to proactively identify trends or the financial strength and experience to effectively service their GL customers and brokers. Both trends make it important for brokers and buyers to work with an insurer that is committed to the GL market and has the understanding and resources to help better manage risks impacting customers.”
Last year saw a high level of mergers and acquisitions in the insurance industry. Buyers should take advantage of that disruption to re-evaluate their needs and whether their insurers are meeting them. Or better yet, anticipating them.
What’s a Buyer to Do?
Buyers—and their brokers— should look to partner with insurers that can spot emerging trends and offer creative solutions to address them proactively.
What should buyers and brokers do, given the trends facing the GL market?
“Brokers and buyers should value insurers that have not only durability and a long history in the general liability business, but also a strong risk management infrastructure,” Perez said. “Your insurer should be able to help you mitigate your specific risks, and complement that with coverage that works for you.”
Beyond robust GL claims and legal management, Liberty Mutual also provides access to one of the insurance industry’s largest risk control departments to help improve safety and mitigate both claim frequency and severity.
In addition, notes Perez, “Even if a company has a less than optimal loss history in general liability, there can be options to provide adequate coverage for that company. The key is to partner with an insurer that has the best-in-class expertise, creativity, and flexibility to make it happen.”
By working closely with their insurers to understand trends and their potential impacts, brokers and buyers can better prepare for the possible GL storm on the horizon.
To learn more about Liberty Mutual’s general liability offering, visit https://business.libertymutualgroup.com/business-insurance/coverages/general-liability-insurance-policy.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.