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.
Commercial Auto Warning: Emerging Frequency and Severity Trends Threaten Policyholders
The slow but steady climb out of the Great Recession means businesses can finally transition out of survival mode and set their sights on growth and expansion.
The construction, retail and energy sectors in particular are enjoying an influx of business — but getting back on their feet doesn’t come free of challenges.
Increasingly, expensive commercial auto losses hamper the upward trend. From 2012 to 2015, auto loss costs increased a cumulative 20 percent, according to the Insurance Services Office.
“Since the recession ended, commercial auto losses have challenged businesses trying to grow,” said David Blessing, SVP and Chief Underwriting Officer for National Insurance Casualty at Liberty Mutual Insurance. “As the economy improves and businesses expand, it means there are more vehicles on the road covering more miles. That is pushing up the frequency of auto accidents.”
For companies with transportation exposure, costly auto losses can hinder continued growth. Buyers who partner closely with their insurance brokers and carriers to understand these risks – and the consultative support and tools available to manage them – are better positioned to protect their employees, fleets, and businesses.
Liberty Mutual’s David Blessing discusses key challenges in the commercial auto market.
“Since the recession ended, commercial auto losses have challenged businesses trying to grow. As the economy improves and businesses expand, it means there are more vehicles on the road covering more miles. That is pushing up the frequency of auto accidents.”
–David Blessing, SVP and Chief Underwriting Officer for National Insurance Casualty, Liberty Mutual Insurance
More Accidents, More Dollars
Rising claims costs typically stem from either increased frequency or severity — but in the case of commercial auto, it’s both. This presents risk managers with the unique challenge of blunting a double-edged sword.
Cumulative miles driven in February, 2016, were up 5.6 percent compared to February, 2015, Blessing said. Unfortunately, inexperienced drivers are at the helm for a good portion of those miles.
A severe shortage of experienced commercial drivers — nearing 50,000 by the end of 2015, according to the American Trucking Association — means a limited pool to choose from. Drivers completing unfamiliar routes or lacking practice behind the wheel translate into more accidents, but companies facing intense competition for experienced drivers with good driving records may be tempted to let risk management best practices slip, like proper driver screening and training.
Distracted driving, whether it’s as a result of using a phone, eating, or reading directions, is another factor contributing to the number of accidents on the road. Recent findings from the National Safety Council indicate that as much as 27% of crashes involved drivers talking or texting on cell phones.
The factors driving increased frequency in the commercial auto market.
In addition to increased frequency, a variety of other factors are driving up claim severity, resulting in higher payments for both bodily injury and property damage.
Treating those injured in a commercial auto accident is more expensive than ever as medical costs rise at a faster rate than the overall Consumer Price Index.
“Medical inflation continues to go up by about three percent, whereas the core CPI is closer to two percent,” Blessing said.
Changing physical medicine fee schedules in some states also drive up commercial auto claim costs. California, for example, increased the cost of physical medicine by 38 percent over the past two years and will increase it by a total of 64 percent by the end of 2017.
And then there is the cost of repairing and replacing damaged vehicles.
“There are a lot of new vehicles on the road, and those cost more to repair and replace,” Blessing said. “In the last few years, heavy truck sales have increased at double digit rates — 15 percent in 2014, followed by an additional 11 percent in 2015.”
The impact is seen in the industry-wide combined ratio for commercial auto coverage, which per Conning, increased from 103 in 2014 to 105 for 2015, and is forecast to grow to nearly 110 by 2018.
None of these trends show signs of slowing or reversing, especially as the advent of driverless technology introduces its own risks and makes new vehicles all the more valuable. Now is the time to reign in auto exposure, before the cost of claims balloons even further.
The factors driving up commercial auto claims severity.
Data Opens Window to Driver Behavior
To better manage the total cost of commercial auto insurance, Blessing believes risk management should focus on the driver, not just the vehicle. In this journey, fleet telematics data plays a key role, unlocking insight on the driver behavior that contributes to accidents.
“Roughly half of large fleets have telematics built into their trucks,” Blessing said. “Traditionally, they are used to improve business performance by managing maintenance and routing to better control fuel costs. But we see opportunity there to improve driver performance, and so do risk managers.”
Liberty Mutual’s Managing Vital Driver Performance tool helps clients parse through data provided by telematics vendors and apply it toward cultivating safer driving habits.
“Risk managers can get overwhelmed with all of the data coming out of telematics. They may not know how to set the right parameters, or they get too many alerts from the provider,” Blessing said.
“We can help take that data and turn it into a concrete plan of action the customer can use to build a better risk management program by monitoring driver behavior, identifying the root causes of poor driving performance and developing training and other approaches to improve performance.”
Actions risk managers can take to better manage commercial auto frequency and severity trends.
Rather than focusing on the vehicle, the Managing Vital Driver Performance tool focuses on the driver, looking for indicators of aggressive driving that may lead to accidents, such as speeding, sharp turns and hard or sudden braking.
The tool helps a risk manager see if drivers consistently exhibit any of these behaviors, and take actions to improve driving performance before an accident happens. Liberty’s risk control consultants can also interview drivers to drill deeper into the data and find out what causes those behaviors in the first place.
Sometimes patterns of unsafe driving reveal issues at the management level.
“Our behavior-based program is also for supervisors and managers, not just drivers,” Blessing said. “This is where we help them set the tone and expectations with their drivers.”
For example, if data analysis and interviews reveal that fatigue factors into poor driving performance, management can identify ways to address that fatigue, including changing assigned work levels and requirements. Are drivers expected to make too many deliveries in a single shift, or are they required to interact with dispatch while driving?
“Management support of safety is so important, and work levels and expectations should be realistic,” Blessing said.
A Consultative Approach
In addition to its Managing Vital Driver Performance tool, Liberty’s team of risk control consultants helps commercial auto policyholders establish screening criteria for new drivers, creating a “driver scorecard” to reflect a potential new hire’s driving record, any Motor Vehicle Reports, years of experience, and familiarity with the type of vehicle that a company uses.
“Our whole approach is consultative,” Blessing said. “We probe and listen and try to understand a client’s strengths and challenges, and then make recommendations to help them establish the best practices they need.”
“With our approach and tools, we do something no one else in the industry does, which is perform the root cause analysis to help prevent accidents, better protecting a commercial auto policyholder’s employees and bottom line.”
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.