Jury Rules in Favor of Insured
Sometime between Jan. 12, 2009 and February 5, 2009, one or more individuals entered the disc jockey’s room at the Cabo Wabo Cantina and Memphis Blues nightclub in Fresno, Calif., and stole about $140,000 of electronic equipment including HD televisions, speakers and sound mixers.
Fresno Rock Taco, which operated the cantina and nightclub, reported the theft to the police upon the advice of its broker, and filed a claim with National Surety Corp., a Fireman’s Fund Co., for the equipment, property damage and for loss of business income. It had two insurance policies with respective limits of $2.6 million and $6.1 million.
Fresno Rock, along with Zone Sports Center LLC, owner of the property at the time of the theft, filed suit against National Surety when the claim was denied.
The insurance company alleged the loss of equipment was due to repossession rather than theft, according to court documents.
Cabo Wabo denied repossession was involved, and noted in court documents that a search of the premises by the state Department of Insurance for possible insurance fraud “revealed no wrongdoing of any kind and no charges of insurance fraud or any other crime have been filed against anyone connected to this matter.”
After a trial in the U.S. District Court for the Eastern District of California, Fresno Division, a jury ruled on Aug. 22 that Cabo Wabo and Zone Sports had suffered a covered loss and did not make a false claim to the insurance company.
It ordered the insurer to pay $2.2 million to Cabo Wabo for business interruption losses and about $275,000 to the property owner for property damage losses.
Scorecard: The insurance company was ordered to pay $2.5 million for the claim.
Takeaway: National Surety’s belief that the theft was questionable and that security measures were inadequate did not sway the jury.
Insurer Need Not Pay Auto Settlement
Tyler Roush was driving his mother’s car on Aug. 3, 2009 when he struck and severely injured a pedestrian, Lloyd Miller.
Miller and his wife Nancy filed suit against Roush and his parents, Sharon and George Roush, and Brash Tygr, which owned and operated a Sonic Drive-In restaurant in Carrollton, Mo. The parents owned 75 percent of Brash Tygr; Tyler and his brother Brandon each owned another 5 percent.
The company was covered as part of a commercial lines master policy issued to Sonic Insurance Advisory Trust by Hudson Specialty Insurance Co. The CGL policy had a Hired and Non-Owned Auto Liability endorsement, under which the family and franchise sought coverage.
Hudson provided a defense, under a reservation of rights, until the family rejected that defense and settled the Millers’ lawsuit for $5.8 million in compensatory and punitive damages, according to court documents. At the same time, the family admitted that Tyler Roush was “conducting the business of Brash Tygr” during the accident.
Tyler Roush, who had not worked for the restaurant for a long time, had been on some errands for his mother at the time of the accident. While he was depositing his mother’s paycheck at a local bank, an employee had handed him some bank deposit bags for use by Sonic Drive-In, according to court documents.
Because of that action, the U.S. District Court for the Western District of Missouri-Kansas City ruled that Roush had “a dual purpose” in his travels and was acting “in the course of [the restaurant’s] business.”
On appeal, the U.S. 8th Circuit Court of Appeals on Oct. 7 disagreed. In a 2-1 decision, the majority ruled there was no dual business purpose. It ruled that “picking up the bags was a matter of convenience, not necessity, for Brash Tygr and the Sonic Drive-In.”
In his dissent, Judge Kermit Bye said it was uncontroverted that Brash Tygr used such deposit bags and that the company did not have “a limitless supply.” Thus, at some point, an employee would have needed to “make a special trip to the bank for deposit bags if Tyler Roush had not brought them to his parents’ home.”
The court also ruled that Hudson had not been given an opportunity to contest coverage in the wake of the family’s admission that Tyler Roush had been acting in the course of business.
Scorecard: The insurance company did not have to cover any of the $5.8 million in settlement costs.
Takeaway: Accepting the deposit bags “was a ‘casual and incidental’ aspect of a purely personal trip that did not give that trip a dual business purpose under Missouri law,” according to the court’s majority opinion.
Insurer Must Pay for Explosion Costs
In 2009, A.H. Meyer’s plant in Winfred, S.D., exploded for the second time in five years. The cause was heptane, a highly volatile solvent manufactured by Citgo Petroleum Corp., which is used in the production of beeswax.
After the first explosion in 2004, A.H. Meyer redesigned the plant so that electrical switches were at least five feet away — the recommended distance — from the 150-gallon storage “kettle” of heptane at the factory. In the previous plant, the distance had only been four feet. The company also added a ventilation system, as recommended.
Nonetheless, an explosion occurred in 2009 when heptane spilled from the kettle and an employee pressed a switch to turn off a pump, according to court documents. Nationwide Insurance Co., which paid for the damage, filed a subrogation suit against Citgo, the manufacturer, and Barton Solvents, the supplier of the heptane.
It argued the companies were liable and negligent because the warnings were inadequate. A safety expert it hired said that the ventilation system meant to reduce risk was actually the reason for the explosion.
Nationwide also argued the companies had provided an express and implied warranty of the heptane.
Both the Circuit Court of the Third Judicial Lake County and the state Supreme Court disagreed, granting the defendants’ motion for summary judgment.
The South Dakota Supreme Court ruled that both the supplier and manufacturer “collectively warned that heptane was volatile and explosive,” and that A.H. Meyer complied with all safety recommendations.
“Ultimately, Nationwide’s inadequate warning claim is based on nothing more than the fact of the accident, speculation, and conjecture,” it ruled.
It also said that pointing out danger is not the same as a warranty, which implies a promise.
Scorecard: Nationwide’s attempt to subrogate the costs for repair were denied.
Takeaway: A safety warning is “an alert,” while a warranty is a “promise that the thing being sold is as represented,” the court ruled.
Fear of Loss
Like dialogue from a bad movie, the stories wrapped around the Ebola virus in recent times leave one looking for the exit. But here, unfortunately, there is no exit, and an Ebola script will continue to be written.
The questions are what to do about it and what role property and casualty insurance can play.
As is the norm in insurance coverage issues, the answer must be: It depends. And counterintuitively, some exclusions in liability and property insurance policies, which don’t specifically exclude viruses, may leave the door open for policyholders to collect on Ebola-related losses from such policies.
We have been here before, although not with quite as fearful a contagion.
In 2003, severe acute respiratory syndrome (SARS) killed more than 900 people, shut down airports, roiled governments and dominated the news. Now, contagion is back, in the form of a virus that relegates SARS to minor league status.
The World Health Organization estimates there will be 10,000 estimated new cases a week before the outbreak subsides.
More than 5,000 people have died to date, the mortality rate is estimated at 50 percent and the World Health Organization estimates there will be 10,000 estimated new cases a week before the outbreak subsides.
Besides death and debilitation, there is a huge economic impact, even outside West Africa. Businesses are taking note of aircraft taken out of service, cruise ships barred from entry, apartments quarantined and stigmatized, and bridal shops closed and inventory destroyed. The reason: infection or alleged or threatened contamination by the Ebola virus, or fear of such infection or contamination.
A Wake-Up Call
As a starting point, SARS was a wake-up call for the insurance industry (if the rapid rise of mold litigation had not already raised the alarm).
Concerns over the insurance of infection came to the fore. Although the Mandarin Oriental Hotel collected millions of dollars on its business interruption claim after a significant SARS-related loss, in the current circumstances such recoveries are at best, less certain, and at worst, potentially barred.
The primary reason is strong exclusionary language, but even with that, all may not be lost. Here is a standard (ISO) Exclusion of Loss Due to Virus or Bacteria endorsement, which may be found in first-party property policies: “We will not pay for loss or damage caused by or resulting from any virus, bacterium or other microorganism that induces or is capable of inducing physical distress, illness or disease.”
Video: A bridal shop shuts down to due customers’ fears of possible infection, but losses aren’t covered.
That language is broad, although it arguably does not encompass alleged or threatened outbreaks.
On the liability-insurance side, we have seen an Absolute Mold Exclusion that excludes loss “related or attributed to, arising out of, resulting from, or in any way caused by any bacteria, virus, mycotoxin, ‘fungus(i),’ ‘spore(s), scent or byproducts.’ ”
That language is also broad, but it arguably does not encompass alleged or threatened outbreaks either.
Further, while those exclusions are broad, they are not used universally.
For example, an exclusion we reviewed recently provided that it excluded loss “which would not have occurred, in whole or in part, but for the actual, alleged or threatened inhalation of, ingestion of, contact with, exposure to, existence of, or presence of, any ‘fungi’ or bacteria on or within a building or structure, including its contents.…”
It does not take a rocket scientist to note that viruses are not listed in the terms of the exclusion.
It does not take a rocket scientist to note that viruses are not listed in the terms of the exclusion, leaving open the possibility that a policyholder might find coverage for loss traced to Ebola. Further, its use of “alleged or threatened … exposure” could be used as evidence that the two other exclusions mentioned above do not reach loss caused by alleged or threatened exposure.
Another path to potential coverage is evaluation of the actual harm that has occurred.
In some cases, the Ebola virus is actually present (the first victim’s fiancé’s apartment in Dallas, where he was staying). In other cases, it is only fear of the virus that has caused the damage (the stigma attaching to bridal gowns in an Akron, Ohio, store visited by someone not yet diagnosed with Ebola). In that case it might be difficult to say that Ebola caused the loss when there is no Ebola to be found on the dresses.
But that raises a serious issue. Property policies usually, if not always, require physical damage as a precondition for coverage for a loss. So what is physical damage? Does it require actual physical change to the property at issue? Or is it enough that the property cannot be used?
If fear of being in a bridal shop visited by an undiagnosed customer requires the shop to shut down, burn merchandise, and lose sales, that “loss of use” of the property might lead to an insured claim.
The physical damage issue is eliminated in some policies with extensions of coverage for “orders of civil authority.” Under such provisions, if access to property is forbidden under government order, coverage may be available, notwithstanding the lack of physical property damage.
Rather than contesting the local health board’s quarantine order based on suspicion of Ebola, companies might welcome it and tender it to their insurer with their claim. Clearly, the cruise ship that was turned back by Belize should carefully review its policy in this regard.
Could specialized coverages be turned to advantage? Pollution legal liability policies would appear to be well-fitted to Ebola contamination issues. These policies extend coverage to pollution events.
Does Ebola contamination, or suspected Ebola contamination, constitute pollution? Close examination of one’s policy may make that clear.
If “pollutant” or “pollution” is defined to include microorganisms or “contaminants” then that would seem airtight. It might be a closer call if the coverage extends to “contaminating substances,” because the insurer likely will assert that a virus is not a substance.
Does Ebola contamination, or suspected Ebola contamination, constitute pollution?
But, because ambiguities in insurance policies are nearly universally construed in favor of the policyholder, there is a reasonable chance that a contaminating substance could be found to include the Ebola virus.
Policyholders, risk managers and counsel pursuing this angle should remember that much of the potentially relevant case law will address the meaning of pollution exclusions. The rules of construction in those cases are significant.
First, the carrier would have the burden of proof to prove the application of the exclusion. Second, exclusions are construed narrowly. And third, the goal in those cases would have been to show that a mold, bacteria or virus was not pollution, rather than the goal here, which is to show the opposite.
So a holding that a virus is not pollution in the pollution exclusion cases may be completely irrelevant to whether a virus is pollution in a policy written to cover pollution.
Landlords have special concerns with Ebola. Even after the Ebola-ridden tenant is cured and/or vacates, others may perceive high levels of risk and refuse to rent the apartment or even nearby ones. This may vest huge importance in tenants’ renters insurance.
Policyholders should also consider directors’ and officers’ coverage, if claims of economic loss are brought against individuals or organizations based on how they reacted to an Ebola outbreak or threat.
While those policies frequently contain pollution exclusions, the availability of Absolute Mold Exclusions or Bacteria or Virus Exclusions strongly suggests that a pollution exclusion should neither apply nor bar coverage.
Even if the case law in a jurisdiction would extend a pollution exclusion to a virus, that is not the end of the story. The loss must “arise out of” or “result from” the virus. There is substantial case law holding that such words of linkage are ambiguous where an insurer attempts to bar coverage for a claim alleging directors’ negligent disclosures relating to pollution.
The conclusion those courts tend to reach is that the loss does not arise out of pollution but rather out of the improper disclosure.
Where do EPLI policies fit in the landscape? Those policies often exclude bodily injury claims, but have an exception for mental anguish or emotional distress.
If a worker is “negligently reassigned” to a work location where there is an actual or feared Ebola outbreak, and that worker claims mental anguish or emotional distress as a result, that claim could be covered under an EPLI policy.
Policyholders, brokers, risk managers and carriers should think critically about whether coverage for Ebola specifically, or pathogens more generally, should be affirmatively offered.
As always, the market will dictate what the market will offer. If there is a true desire for such coverage and matching appetite and ability to underwrite it accurately, the future might lead to clear Ebola coverage across all lines of coverage.
As policyholders and insurance companies wend their way through some of the issues identified above, they will likely come to some landing point on the efficacy of this coverage.
Passion for the Prize
In his 1990 book, The Prize: The Epic Quest for Oil, Money and Power, Pulitzer Prize winning author Daniel Yergin documented the passion that drove oil exploration from the first oil well sunk in Titusville, Penn. by Col. Edwin Drake in 1859, to the multinational crusades that enriched Saudi Arabia 100 years later.
Even with the recent decline in crude oil prices, the quest for oil and its sister substance, natural gas, is as fevered now as it was in 1859.
While lower product prices are causing some upstream oil and gas companies to cut back on exploration and production, they create opportunities for others. In fact, for many midstream oil and gas companies, lower prices create an opportunity to buy low, store product, and then sell high when the crude and gas markets rebound.
The current record supply of domestic crude oil and gas largely results from horizontal drilling and hydraulic fracturing methods, which make it practical to extract product in formerly played-out or untapped formations, from the Panhandle to the Bakken.
But these technologies — and the current market they helped create — require underwriters that are as passionate, committed and knowledgeable about energy risk as the oil and gas explorers they insure.
Liability fears and incessant press coverage — from the Denton fracking ban to the Heckmann verdict — may cause some underwriters to regard fracking and horizontal drilling with a suppressed appetite. Other carriers, keen to generate premium revenue despite their limited industry knowledge, may try to buy their way into this high-stakes game with soft pricing.
For Matt Waters, the chief underwriting officer of Liberty Mutual Commercial Insurance Specialty – Energy, this is the time to employ a deep underwriting expertise to embrace the current energy market and extraction methods responsibly and profitably.
“In the oil and gas business right now, you have to have risk solutions for the new market, fracking and horizontal drilling, and it can’t be avoidance,” Waters said.
Matt Waters, chief underwriting officer of Liberty Mutual Commercial Insurance Specialty – Energy, reviews some risk management best practices for fracking and horizontal drilling.
Waters’ group underwrites upstream energy risks — those involved in all phases of onshore exploration and production of crude oil and natural gas from wells sunk into the earth — and midstream energy risks, those that involve the distribution or transportation of oil and gas to processing plants, refineries and consumers.
Risk in Motion
Seven to eight years ago, the technologies to horizontally drill and use fluids to fracture shale formations were barely in play. Now they are well established and have changed the domestic energy market, and consequently risk management for energy companies.
One of those changes is in the area of commercial auto and related coverages.
Fracking and horizontal drilling have dramatically altered oil and gas production, significantly increasing the number of vehicle trips to production and exploration sites. The new technologies require vehicles move water for drilling fluids and fracking, remove these fluids once they are used, bring hundreds of tons of chemicals and proppants, and transport all the specialty equipment required for these extraction methods.
The increase in vehicle use comes at a time when professional drivers, especially those with energy skills, are in short supply. The unfortunate result is more accidents.
“In the oil and gas business right now, you have to have risk solutions for the new market, fracking and horizontal drilling, and it can’t be avoidance.”
— Matt Waters, chief underwriting officer, Liberty Mutual Commercial Insurance Specialty – Energy
For example, in Pennsylvania, home to the gas-rich Marcellus Shale formation, overall traffic fatalities across the state are down 19 percent, according to a recent analysis by the Associated Press. But in those Pennsylvania counties where natural gas and oil is being sought, the frequency of traffic fatalities is up 4 percent.
Increasing traffic volume and accidents is also driving frequency trends in workers compensation and general liability.
In the assessment and transfer of upstream and midstream energy risks, however, there simply isn’t enough claims history in the Marcellus formation in Pennsylvania or the Bakken formation in North Dakota for underwriters to rely on data to price environmental, general and third-party liability risks.
That’s where Liberty Mutual’s commitment, experience and ability to innovate come in. Liberty Mutual was the first carrier to put together a hydraulic fracking risk assessment that gives companies using this extraction method a blueprint to help protect against litigation down the road.
Liberty Mutual insures both lease operators and the contractors essential to extracting hydrocarbons. As in many underwriting areas, the name of the game is clarity around what the risk is, and who owns it.
When considering fracking contractors, Waters and his team work to make sure that any “down hole” risks, be that potential seismic activity, or the migration of methane into water tables, is born by the lease holder.
For the lease holders, Waters and his team of specialty underwriters recommend their clients hold both “sudden and accidental” pollution coverage — to protect against quick and clear accidental spills — and a stand-alone pollution policy, which covers more gradual exposure that unfolds over a much longer period of time, such as methane leaking into drinking water supplies.
Those are two different distinct coverages, both of which a lease holder needs.
Matt Waters discusses the need for stand-alone environmental coverage.
The Energy Cycle
Domestic oil and gas production has expanded so drastically in the past five years that the United States could now become a significant energy exporter. Billions of dollars are being invested to build pipelines, liquid natural gas processing plants and export terminals along our coasts.
While managing risk for energy companies requires deep expertise, developing insurance programs for pipeline and other energy-related construction projects demands even more experience. Such programs must manage and mitigate both construction and operation risks.
Matt Waters discusses future growth for midstream oil and gas companies.
In the short-term, domestic gas and oil production is being curtailed some as fuel prices have recently plummeted due to oversupply. In the long-term, those domestic prices are likely to go back up again, particularly if legislation allows the fuel harvested in the United States to be exported to energy deficient Europe.
Waters and his underwriting team are in this energy game for the long haul — with some customers being with the operation for more than 25 years — and have industry-leading tools to play in it.
Beyond Liberty Mutual’s hydraulic fracturing risk assessment sheet, Waters’ area created a commercial driver scorecard to help its midstream and upstream clients select and manage drivers, which are in such great demand in the industry. The safety and skill of those drivers play a big part in preventing commercial auto claims, Waters said.
Liberty Mutual’s commitment to the energy market is also seen in Waters sending every member of his underwriting team to the petroleum engineering program at the University of Texas and hiring underwriters that are passionate about this industry.
Matt Waters explains how his area can add value to oil and gas companies and their insurance brokers and agents.
For Waters, politics and the trends of the moment have little place in his long-term thinking.
“We’re committed to this business and to deeply understanding how to best manage its risks, and we have been for a long time,” Waters said.
And that holds true for the latest extraction technologies.
“We’ve had success writing fracking contractors and horizontal drillers, helping them better manage the total cost of risk,” Waters said.
To learn more about how Liberty Mutual Insurance can meet your upstream and midstream energy coverage needs, contact your broker, or Matt Waters at email@example.com.
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.