McGuireWoods Insurance Recovery Blog

McGuireWoods Insurance Recovery Blog

Insights for Policyholders

Best Practices, Property Insurance

Hurricane Harvey: Texas Property Owners Should File Written Claims Before Friday, Sept. 1, 2017

Hurricane Harvey has devastated many parts of Texas. As Texans deal with the impact of the storm, policyholders need to be mindful of their rights.

Effective Friday, Sept. 1, 2017, a new law under House Bill 1774 takes effect that governs Texas insurance claims. Specifically, there are differences in this new law that could affect Texas policyholders who suffer claims involving “forces of nature.” The new law lessens penalties against insurance companies that fail to pay valid claims, pay less than amounts owed, or fail to timely pay such claims.

To take advantage of the enhanced penalties of the current law, no later than Thursday, Aug. 31, 2017, policyholders must (1) file claims in writing (which includes electronic mail), and (2) advise the insurance company of the facts relating to the claim.

Telephone calls will not suffice. It is important that policyholders provide notice to their insurance companies in writing. Make sure that the claim notice is dated before September 1, 2017, and keep a copy of the notice.

For additional information concerning House Bill 1774 and your rights and coverage under your policies, please contact Mark Lawless or Pamella Hopper.

Reps & Warranties Insurance

Maximizing the Value of Your R&W Insurance Policy

The global M&A boom has spurred an increase in the use of representation and warranty insurance (“RWI”), which is designed to protect the insured party against breaches of a sellers’ representations and warranties in a corporate acquisition or merger agreement. RWI is increasingly used by buyers to differentiate their bids in an ultracompetitive marketplace, as well as by sellers look to maximize returns and minimize post-closing risk.  A purchase agreement that incorporates a RWI policy can influence a seller’s ultimate decision when selecting a buyer.

For private equity-backed portfolio companies, incorporating RWI in a deal allows sellers to pass profitable returns to the fund’s limited partners and can reduce or eliminate claw back distributions from the LPs when indemnification claims are subsequently made.  RWI also gives sellers the full value of the sale without tying proceeds up in escrows, holdbacks, and can reduce or eliminate entirely future indemnification claims.

For buyers, a RWI policy helps to eliminate the need to decide whether to make claims against “friendly” indemnitors (e.g., management), and can often result in a buyer-favorable purchase agreement in a seller-favorable climate.  RWI can provide additional indemnification limits above the terms of the purchase and an extended period of time to recover for any breaches beyond the survival period.

Yet at each stage of the acquisition, buyers regularly fail to maximize the value that the RWI policy can provide.  By utilizing the RWI policy at each stage of an acquisition, a buyer can add value to its acquisition.

How to Maximize the Value of the RWI Policy

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Cyber Insurance

Friday’s Massive Malware Attack – Cyber Insurance and the Importance of IMMEDIATE Notice to Insurers

On Friday, May 12, 2017, a massive ransomware attack swept across the globe. As of the date of this post, the attack reportedly had infected more than 100,000 organizations in 150 countries. The attack continues to propagate in different and more malicious forms and it is likely some of our clients have been impacted.

This malware, called “WannaCry,” locks out users and threatens to destroy data unless the victim pays a ransom to decrypt the data. The initial ransom demand was $300, to be paid in Bitcoin, and it is reported that the demand is increasing. It is unclear whether the ransom payment will buy the freedom of a single computer or an entire network. If the former, the attack may prove very expensive if companies agree to pay the ransom.

Impacted companies should immediately review their cyber insurance policy if they have purchased one. Many cyber policies offer ransom or extortion coverage, which includes the cost of the ransom payment. Cyber policies also typically provide coverage for the cost of investigating and responding to a ransomware attack and for lost business income arising from the attack.

Timing is very important. Most cyber insurance policies provide coverage only for costs incurred after the insured notifies the insurance company. Therefore, the costs that businesses are incurring this weekend to respond to the WannaCry attack, including ransom payments, will not be covered unless the business provides notice to the insurance company prior to incurring the payment. Some policies also require that the policyholder inform the applicable law enforcement agency and obtain the insurer’s consent before making any ransom payment. Therefore, despite the urge to move swiftly in response to this crisis, we recommend policyholders understand and comply with the notice provisions of their policies to insure they preserve their right to insurance coverage.

In addition to these insurance considerations, there are a number of critical decision points facing affected companies right now, including whether to pay the ransom, how to comprehensively assess and remediate any damage done, which other parties to include in this process, and what actions may need to be taken to comply with applicable law. Actions that companies take today may have lasting consequences long into the future.

Please contact us if we can assist in responding to these malware attacks.

Crime Insurance, Policy Interpretation

Federal Court: Computer Fraud Provision Does Not Cover Fraudulent Debit Card Transactions Conducted Over the Telephone

Last month, the Northern District of Georgia issued a strongly pro-insurer decision holding that a policy insuring computer fraud did not provide coverage for $11.4 million in fraudulent debit card redemptions made over the telephone.  In InComm Holdings, Inc. v. Great Am. Ins. Co., No. 1:15-cv-2671-WSD, 2017 WL 1021749 (N.D. Ga. Mar. 16, 2017), the court granted summary judgment for the insurer, Great American, concluding that the insured’s losses did not result “directly” from the “use” of a computer. Continue Reading

Reps & Warranties Insurance

Reps & Warranties Insurance In M&A Deals – Getting the Deal Done

Note:  This is the first in a series of posts that will discuss the use of RWI in Mergers & Acquisitions.

Essential to a buyer’s and seller’s evaluation of the purchase and sale of a company is the allocation of exposure between them for unknown risks and liabilities associated with the breach of representations and warranties in the purchase agreement, such as inventory reporting or products liability exposures. Less than two decades ago, very few considered purchasing Representations and Warranties Insurance (“RWI”), a product designed for the express purpose of providing insurance for the breach of a representation (“rep”) or warranty contained in the purchase or merger agreement. Recently, however, these policies have emerged as an important tool to allocate risk to an insurer. RWI has also been recognized as an enhancement to the value of the deal, as well as critical to closing deals that might not otherwise get done.

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Best Practices, Employment Practices Liability Insurance, Notice

Law School Wins First Round in Fight Under EPLI Policy

Claims-made issues are often complicated in employment practices liability insurance (EPLI) cases because of the nature of discrimination claims. As a prerequisite to filing suit, a claimant must first submit a charge to the EEOC or other administrative body for investigation.  Because of this, a claimant may file an EEOC charge in one policy period but file the subsequent lawsuit in a later policy period.  In most EPLI policies, the event triggering coverage is a claim for an employment wrongful act which is first made during the policy period.  Since both the administrative charge and the lawsuit usually fall within the policy’s definition of a claim, a dispute may arise over when the claim was first made.

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Best Practices, Risk Management

Four Questions to Ask Before Renewing Your Policy

Most business insurance policies are issued with one-year policy terms, creating a natural opportunity for businesses, their counsel and risk managers to re-evaluate coverage each year at renewal time. Many companies fail to take advantage of this opportunity and simply renew their policies each year without considering whether their insurance needs – or the coverages available – may have changed.  Here are four questions to ask when your policies come for renewal:

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Best Practices, Duty to Defend, Duty to Indemnify, Notice

Eleventh Circuit: Insurer Not Required to Reimburse Pre-Tender Defense Costs

It may seem obvious that policyholder defendants should immediately notify their liability insurance carrier whenever they are faced with potentially covered litigation.  Among other things, policyholders want the benefit of the insurer-paid defense their policy provides.  But for a variety of reasons, this does not always happen, and in some cases policyholders find themselves funding their own defense for a period of time before their insurance carrier is aware of the litigation and has agreed to accept the defense.  Frequently, this leads to dispute about whether such “pre-tender” defense costs are covered under the policy.

The Eleventh Circuit faced this situation in, Inc. v. Travelers Property Casualty Company of America, and on January 9 held that under Florida law, Travelers was not required under Florida’s Claims Administration Statute (CAS) to reimburse its policyholder,, for pre-tender defense costs incurred in an underlying copyright infringement suit.

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Business Interruption, Cyber Insurance

Insurance Coverage for Lost Profits Arising from Cyber Attacks on the U.S. Power Grid – Contingent Business Interruption Coverage for the Internet of Things

The Washington Post reported last week that Russian hackers had penetrated the U.S. utility grid through Burlington Electric Department, a Vermont utility.  Although the utility later clarified that the attacked computer was not connected to the grid and that the connection to Russia was not confirmed, hundreds of news sources picked up the story, demonstrating the widespread concern over cyber intrusions into our electric grid.

The United States electricity grid is critically important to our lives.  The “grid” is vulnerable to not only weather-related power outages but also to cyber attacks.  The most likely path for a hacker into a utility is through a utility’s control systems, which almost always are connected to the internet.  The connection between the control systems in any piece of equipment or device and the internet is called the “Internet of Things.”

A shutdown in service by a utility by a cyber attack could produce dire economic consequences to both small and large businesses.  It is therefore essential that businesses try to manage this business interruption risk, and because the risk is outside of a business’s control, insurance is the best (and possibly only) tool to use.

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Best Practices, Policy Interpretation

Avoiding the Minefields of Claims-Made Insurance Coverage

This is the first in a series of posts relating to what we will call the “minefields” of claims made insurance coverage.  Fifty years ago, most insurers issued liability insurance policies on “occurrence” policy forms.  As insurers expanded their coverage offerings for professional and executive risks in the 1960s and 1970s, they began to use “claims-made” policy forms.  Today, while most commercial general liability or “CGL” policies are issued on occurrence forms, claims-made policies dominate the marketplace for professional liability, D&O, fiduciary and other specialty coverages.

Claims-made policies differ from occurrence-based policies primarily in the method of triggering or activating coverage under the policy.  These policies create unique challenges for policyholders both in connection with the reporting of claims as well as with the purchase of a policy with the appropriate terms, conditions and exclusions for the risks that the insured faces.

To understand claims-made coverage, it is important to start with a comparison of occurrence policy forms with claims-made forms.  Occurrence-based CGL policy forms insure bodily injury or property damage that takes place during the policy period regardless when the claim is made against the insured.  The “trigger” of coverage is when the claimant is injured or when the property damage takes place.

The trigger of coverage analysis with an occurrence-based form is not always simple, however.  For example, in an asbestos toxic-tort case, it is frequently difficult to pinpoint the date of the occurrence because there is a latency period between the original exposure to asbestos and the manifestation of injury.  Courts have developed different rules to determine the trigger of coverage in this type of latent injury case:  (1) the “exposure” trigger, which applies the policy in effect at the time of the exposure to the harm; (2) the “manifestation” trigger, which applies the policy that was in effect at the time the injury manifested itself; (3) the “injury-in-fact” trigger, which applies the policy or policies that were in effect at any time actual injury occurred; and (4) the “continuing injury” trigger, which applies all policies in effect from the initial exposure through the manifestation of the injury.

Claims-made policies operate very differently.  A claims-made policy provides coverage if the claim is made against the insured during the policy period, regardless when the injury took place (although most policies require the injury to occur after a “retroactive date” stated in the policy).  Most claims made policies also provide that the insured must report the claim to the insurer during the policy period or during an “extended reporting period.”

There are four key differences between occurrence-based policies and claims-made policies.  First, with a claims-made policy, the threshold event is a claim against the insured during the policy period.  In contrast, occurrence-based CGL coverage looks to whether injury or damage occurred during the policy period.

Second, with a claims-made policy, it is the concept of a “wrongful act” (typically defined as an “act, error or omission”) that gives rise to coverage.  With occurrence-based CGL policies, on the other hand, it is the bodily injury or property damage that gives rise to coverage, not the wrongful act by the insured.

Third, reporting to the insurer is an affirmative element of coverage that the insured generally must prove under the terms of a claims-made policy.  The insured must notify the insurance company of the claim during a specified time period (either during the policy period or during the extended reporting period) or lose coverage.  Under occurrence-based policies, notice is not an element of coverage, but a policy condition.

Because reporting is an element of coverage, most courts interpreting claims-made policies strictly enforce notice requirements.  If the insured fails to provide notice within the required period under a claims-made policy, the insurer can refuse to cover the loss without proving that the insurer was prejudiced by the delay.  In most states, if an insured fails to provide timely notice under an occurrence-based CGL policy, the insurer must provide coverage unless the delay resulted in prejudice to the insurer.

In future posts in this series, we will discuss the key coverage issues that arise under claims-made policies, best practices in providing notice to insurers under claims-made policies, and recommendations to policyholders regarding the purchase of claims-made policies.