Subrogation Attempt Rejected
St. Paul Mercury Insurance unsuccessfully sought to recover $14.5 million from a security company after a propane tank exploded in an insured’s building.
A tank of liquefied petroleum — which later was determined to be damaged or defective prior to delivery — had been delivered to a jeweler who rented space in the building.
St. Paul Mercury Insurance, as subrogator for Mallers, claimed the security company was negligent and breached its contract by not stopping or reporting the delivery of the propane tank. The insurer argued that Aargus “knew or should have known” that it was creating “a dangerous condition.”
The contract between the building owner and the security company did not include specific responsibilities regarding the inspection of deliveries.
The Circuit Court of Cook County, Illinois, rejected the insurer’s argument, granting a summary judgment. That court also rejected affidavits from experts, who offered their opinions that appropriate security procedures would not permit delivery of propane tanks. On appeal, the court agreed, ruling that neither expert was part of the contract between the building owner and security company, and that their views on high-rise security were “irrelevant.”
The appeals court upheld the lower court’s decision that the security company “never undertook a duty to check on propane tanks” as part of its responsibilities.
Scorecard: St. Paul Mercury Insurance Co. will not recoup the payment of $14.5 million it paid in claims following an explosion.
Takeaway: A court will not expand a defendant’s duties beyond what the parties agreed upon in their contract.
Insurer Need Not Pay for Atrium Collapse Settlement
The U.S. Fourth Circuit Court of Appeals upheld a summary judgment which allowed ACE American Insurance Co. to reject reimbursement of a $26 million settlement claim.
The claim resulted from the Sept. 5, 2007 collapse of an 18-story, 2,400 ton glass atrium that was being built as part of a $900 million Gaylord National Resort and Convention Center in Oxon Hill, Md. Gaylord hired PTJV, a joint venture between Perini Building Co. and Turner Construction Co., to serve as construction manager.
A year after the collapse of the atrium, PTJV filed a complaint against Gaylord for establishment and enforcement of a mechanic’s lien, breach of contract, quantum meruit, and violation of the Maryland Prompt Payment Act. PTJV alleged Gaylord owed it nearly $80 million. Gaylord countersued for breach of contract and breach of fiduciary duty, seeking reimbursement of about $65 million due to PTJV’s alleged failure to properly manage scheduling and costs, and failing to build a high-quality project at the agreed-upon price.
Gaylord and PTJV agreed to settle the Gaylord action on Nov. 28, 2008, with Gaylord paying an additional $42.3 million and PTJV crediting back $26 million. PTJV did not seek ACE’s consent prior to entering the settlement agreement, and did not seek reimbursement for the settlement amount until about six months afterward, according to court documents.
ACE denied payment, and PTJV filed suit alleging breach of contract and bad faith. A district court upheld ACE’s subsequent motion for a summary judgment because of the lack of prior consent to the settlement, and the appeals court agreed with that decision.
Scorecard: ACE will not need to pay a $26 million insurance claim, following an insured’s settlement of litigation without prior consent.
Takeaway: The decision breaks away from the trend of courts requiring evidence of prejudice when an insurance company denies coverage due to lack of notice.
ERISA Time Limits Upheld
The U.S. Supreme Court denied the petition of a Wal-Mart public relations executive to litigate the denial of long-term disability benefits under the retail store’s plan, administered by Hartford Life & Accident Insurance Co.
A unanimous decision of the High Court ruled that Julie Heimeshoff failed to abide by the three year statute of limitations in filing her request for judicial review of the insurance company’s denial of benefits.
Although Heimeshoff filed the litigation within three years after the final denial of benefits, she did not file it within three years after “proof of loss,” as was required in the plan documents.
Suffering from lupus and fibromyalgia, Heimeshoff stopped working in June 2005. In August of that year, she filed a claim for long-term disability benefits, listing her symptoms as “extreme fatigue, significant pain, and difficulty in concentration.” That claim was ultimately denied by Hartford when her rheumatologist never responded to requests for additional information.
Hartford later allowed her to reopen the claim without need for an appeal, if the physician provided the requested information. After another physician evaluation and report, Hartford’s physician concluded Heimeshoff was able to perform the “activities required by her sedentary occupation.”
In her complaint, which was joined by the U.S. government, Heimeshoff argued the controlling statute should be the Employee Retirement Income Security Act, which provides a two-tier process of internal review and litigation. A district court granted a motion by The Hartford and Wal-Mart to dismiss the lawsuit. That was upheld by the U.S. Second Circuit Court of Appeals. The High Court agreed, ruling the statute of limitations was reasonable and there were no contrary statutes that should control the process.
Scorecard: The Hartford need not pay long-term disability benefits to the employee.
Takeaway: The U.S. Supreme Court’s decision resolves a split among various federal appeals courts, some of which had upheld plan provisions and others which found they were not enforceable.
Court Reverses Product Liability Decision
Indalex was seeking duty-to-defend coverage from the insurer under a commercial umbrella policy as a result of lawsuits filed in five states alleging the company’s doors and windows were defectively designed or manufactured, resulting in water leakage, mold, cracked walls and personal injury.
The trial court ruled there was no obligation to defend or indemnify Indalex as the claims involved “faulty workmanship” and thus did not constitute an “occurrence.” It dismissed the lawsuit.
On appeal, the higher court found that the underlying claims did count as “occurrences” because the defective products led to damages elsewhere and were “neither expected nor intended from the standpoint of the Insured.”
The court ruled that the lower court improperly ignored legally viable product-liability-based tort claims, rejecting the use of the state’s “gist of the action” doctrine, which prevents a “plaintiff from re-casting ordinary breach of contract claims into tort claims.” The case was remanded to the lower court for further action on the claims.
Scorecard: National Union may incur claims up to $25 million as Indalex defends itself from the underlying lawsuits in five states.
Takeaway: The decision provides an expansive reading of an insurance company’s obligations in commercial general liability coverage.
Coping with Cancellations
Airlines typically can offset revenue losses for cancellations due to bad weather either by saving on fuel and salary costs or rerouting passengers on other flights, but this year’s revenue losses from the worst winter storm season in years might be too much for traditional measures.
At least one broker said the time may be right for airlines to consider crafting custom insurance programs to account for such devastating seasons.
For a good part of the country, including many parts of the Southeast, snow and ice storms have wreaked havoc on flight cancellations, with a mid-February storm being the worst of all. On Feb. 13, a snowstorm from Virginia to Maine caused airlines to scrub 7,561 U.S. flights, more than the 7,400 cancelled flights due to Hurricane Sandy, according to MasFlight, industry data tracker based in Bethesda, Md.
Roughly 100,000 flights have been canceled since Dec. 1, MasFlight said.
Just United, alone, the world’s second-largest airline, reported that it had cancelled 22,500 flights in January and February, 2014, according to Bloomberg. The airline’s completed regional flights was 87.1 percent, which was “an extraordinarily low level,” and almost 9 percentage points below its mainline operations, it reported.
And another potentially heavy snowfall was forecast for last weekend, from California to New England.
The sheer amount of cancellations this winter are likely straining airlines’ bottom lines, said Katie Connell, a spokeswoman for Airlines for America, a trade group for major U.S. airline companies.
“The airline industry’s fixed costs are high, therefore the majority of operating costs will still be incurred by airlines, even for canceled flights,” Connell wrote in an email. “If a flight is canceled due to weather, the only significant cost that the airline avoids is fuel; otherwise, it must still pay ownership costs for aircraft and ground equipment, maintenance costs and overhead and most crew costs. Extended storms and other sources of irregular operations are clear reminders of the industry’s operational and financial vulnerability to factors outside its control.”
Bob Mann, an independent airline analyst and consultant who is principal of R.W. Mann & Co. Inc. in Port Washington, N.Y., said that two-thirds of costs — fuel and labor — are short-term variable costs, but that fixed charges are “unfortunately incurred.” Airlines just typically absorb those costs.
“I am not aware of any airline that has considered taking out business interruption insurance for weather-related disruptions; it is simply a part of the business,” Mann said.
Chuck Cederroth, managing director at Aon Risk Solutions’ aviation practice, said carriers would probably not want to insure airlines against cancellations because airlines have control over whether a flight will be canceled, particularly if they don’t want to risk being fined up to $27,500 for each passenger by the Federal Aviation Administration when passengers are stuck on a tarmac for hours.
“How could an insurance product work when the insured is the one who controls the trigger?” Cederroth asked. “I think it would be a product that insurance companies would probably have a hard time providing.”
But Brad Meinhardt, U.S. aviation practice leader, for Arthur J. Gallagher & Co., said now may be the best time for airlines — and insurance carriers — to think about crafting a specialized insurance program to cover fluke years like this one.
“I would be stunned if this subject hasn’t made its way up into the C-suites of major and mid-sized airlines,” Meinhardt said. “When these events happen, people tend to look over their shoulder and ask if there is a solution for such events.”
Airlines often hedge losses from unknown variables such as varying fuel costs or interest rate fluctuations using derivatives, but those tools may not be enough for severe winters such as this year’s, he said. While products like business interruption insurance may not be used for airlines, they could look at weather-related insurance products that have very specific triggers.
For example, airlines could designate a period of time for such a “tough winter policy,” say from the period of November to March, in which they can manage cancellations due to 10 days of heavy snowfall, Meinhardt said. That amount could be designated their retention in such a policy, and anything in excess of the designated snowfall days could be a defined benefit that a carrier could pay if the policy is triggered. Possibly, the trigger would be inches of snowfall. “Custom solutions are the idea,” he said.
“Airlines are not likely buying any of these types of products now, but I think there’s probably some thinking along those lines right now as many might have to take losses as write-downs on their quarterly earnings and hope this doesn’t happen again,” he said. “There probably needs to be one airline making a trailblazing action on an insurance or derivative product — something that gets people talking about how to hedge against those losses in the future.”
Hot Hacks That Leave You Cold
Thousands of dollars lost at the blink of an eye, and systems shut down for weeks. It might sound like something out of a movie, but it’s becoming more and more of a reality thanks to modern hackers. As technology evolves and becomes more sophisticated, so do the occurrence of cyber breaches.
“The more we rely on technology, the more everything becomes interconnected,” said Jackie Lee, associate vice president, Cyber Liability at Nationwide. “We are in an age where our car is a giant computer, and we can turn on our air conditioners with our phones. Everyone holds data. It’s everywhere.”
Phishing Out Fraud
According to Lee, phishing is on the rise as one of the most common forms of cyber attacks. What used to be easy to identify as fraudulent has become harder to distinguish. Gone are the days of the emails from the Nigerian prince, which have been replaced with much more sophisticated—and tricky—techniques that could extort millions.
“A typical phishing email is much more legitimate and plausible,” Lee said. “It could be an email appearing to be from human resources at annual benefits enrollment or it could be a seemingly authentic message from the CFO asking to release an invoice.”
According to Lee, the root of phishing is behavior and analytics. “Hackers can pick out so much from a person’s behavior, whether it’s a key word in an engagement survey or certain times when they are logging onto VPN.”
On the flip side, behavior also helps determine the best course of action to prevent phishing.
“When we send an exercise email to test how associates respond to phishing, we monitor who has clicked the first round, then a second round,” she said. “We look at repeat offenders and also determine if there is one exercise that is more susceptible. Once we understand that, we can take the right steps to make sure employees are trained to be more aware and recognize a potentially fraudulent email.”
Lee stressed that phishing can affect employees at all levels.
“When the exercise is sent out, we find that 20 percent of the opens are from employees at the executive level,” she said. “It’s just as important they are taking the right steps to ensure they are practicing what they are preaching.”
Locking Down Ransomware
Another hot hacking ploy is ransomware, a type of property-related cyber attack that prevents or limits users from accessing their system unless a ransom is paid. The average ransom request for a business is around $10,000. According to the FBI, there were 2,400 ransomware complaints in 2015, resulting in total estimated losses of more than $24 million. These threats are expected to increase by 300% this year alone.
“These events are happening, and businesses aren’t reporting them,” Lee said.
In the last five years, government entities saw the largest amount of ransomware attacks. Lee added that another popular target is hospitals.
After a recent cyber attack, a hospital in Los Angeles was without its crucial computer programs until it paid the hackers $17,000 to restore its systems.
Lee said there is beginning to be more industry-wide awareness around ransomware, and many healthcare organizations are starting to buy cyber insurance and are taking steps to safeguard their electronic files.
“A hospital holds an enormous amount of data, but there is so much more at stake than just the computer systems,” Lee said. “All their medical systems are technology-based. To lose those would be catastrophic.”
And though not all situations are life-or-death, Lee does emphasize that any kind of property loss could be crippling. “On a granular scale, you look at everything from your car to your security system. All data storage points could be controlled and compromised at some point.”
The Future of Cyber Liability
According to Lee, the Cyber product, which is still in its infancy, is poised to affect every line of business. She foresees underwriting offering more expertise in crime and becoming more segmented into areas of engineering, property, and automotive to address ongoing growing concerns.”
“Cyber coverage will become more than a one-dimensional product,” she said. “I see a large gap in coverage. Consistency is evolving, and as technology evolves, we are beginning to touch other lines. It’s no longer about if a breach will happen. It’s when.”
About Nationwide’s Cyber Solutions
Nationwide’s cyber liability coverage includes a service-based solution that helps mitigate losses. Whether it’s loss prevention resources, breach response and remediation expertise, or an experienced claim team, Nationwide’s comprehensive package of services will complement and enhance an organization’s cyber risk profile.
Nationwide currently offers up to $15 million in limits for Network Security, Data Privacy, Technology E&O, and First Party Business Interruption.
Products underwritten by Nationwide Mutual Insurance Company and Affiliated Companies. Not all Nationwide affiliated companies are mutual companies, and not all Nationwide members are insured by a mutual company. Subject to underwriting guidelines, review, and approval. Products and discounts not available to all persons in all states. Home Office: One Nationwide Plaza, Columbus, OH. Nationwide, the Nationwide N and Eagle, and other marks displayed on this page are service marks of Nationwide Mutual Insurance Company, unless otherwise disclosed. © 2016 Nationwide Mutual Insurance Company.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Nationwide. The editorial staff of Risk & Insurance had no role in its preparation.