McGuireWoods Insurance Recovery Blog

McGuireWoods Insurance Recovery Blog

Insights for Policyholders

Reps & Warranties Insurance

Maximizing the Value of Your R&W Insurance Policy

Are you covered? word written under torn brown paper.

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

Lock consist of binary code.

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

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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

A close-up of a highly stylized compass face.  The compass needle has a blue arrowhead point and is pointed upwards to the word "insurance," which is printed in blue letters.  To the left and right of the word "insurance" is the word "risk" printed three times in gray letters.

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

Businessman magical touch concept

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

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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

Are you covered? word written under torn brown paper.

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 EmbroidMe.com, 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, Emboidme.com, 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

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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

A close-up of a highly stylized compass face.  The compass needle has a blue arrowhead point and is pointed upwards to the word "insurance," which is printed in blue letters.  To the left and right of the word "insurance" is the word "risk" printed three times in gray letters.

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.

 

Policy Interpretation, Professional Liability Insurance

Fifth Circuit Narrowly Construes Prior Knowledge Exclusion in Claims-Made Policy and Affirms Bad Faith Verdict

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Insurers frequently rely on “prior knowledge” exclusions in an effort to avoid coverage under claims-made liability insurance policies.  In OneBeacon Insurance Co. v. T. Wade Welch & Associates et al., the Fifth Circuit recently affirmed a $28 million judgment following a jury verdict against One Beacon Insurance Company, finding that the insurer had wrongfully declined to indemnify a law firm in a legal malpractice case based on a prior knowledge exclusion in its policy.  The court held that the prior knowledge exclusion in the policy was overly broad and that “[a]s written . . . the exclusion renders the coverage illusory and is facially absurd.”

The Policies:  OneBeacon issued a series of professional liability policies to T. Wade Welch & Associates (the “Welch Firm”) beginning in December 2006.  In the application for the first policy, Wade Welch, the principal of the firm, represented that after inquiring of each lawyer in the firm, he was not aware of “any fact or circumstance, act, error, omission or personal injury which might be expected to be the basis of a claim or suit” against the firm.”

Each of the One Beacon policies contained a prior knowledge exclusion barring coverage for

any claim arising out of a wrongful act occurring prior to the policy period if, prior to the effective date of the first Lawyers’ Professional Liability Insurance Policy issued by [OneBeacon] to [the Welch Firm] and continuously renewed and maintained in effect to the inception of this policy period … you had a reasonable basis to believe that you had committed a wrongful act, violated a disciplinary rule, or engaged in professional misconduct; [or] you could foresee a claim would be made against you.

For an additional premium, the Welch Firm purchased a retroactive date for the policy of January 4, 1995.  The retroactive date set the earliest possible date when a wrongful act or omission could occur and still be covered under the policy.

The Welch Firm renewed the 2006-2007 policy in subsequent years, making the same representations about its knowledge of potential claims.

The Malpractice Claim:  The Welch Firm represented DISH Network Corp. in a lawsuit filed against it by Russia Media Group (“RMG”).  During the course of discovery in the DISH lawsuit, the Welch Firm failed to timely serve discovery responses after the court had ordered DISH to respond.  In February 2007, RMG moved for “death penalty” sanctions for DISH’s failure to respond to the discovery.  In February 2008, the district court affirmed an order entered by the magistrate judge granting sanctions.  Specifically, the court held that DISH could not oppose RMG’s three primary claims and barred DISH from challenging RMG’s damages.

The Coverage Dispute:  Prior to Welch’s application for the renewal of the initial OneBeacon policy for a subsequent (2007-2008) year, the firm failed to respond to the discovery giving rise to the subsequent sanctions motion.  Mr. Welch was not aware of this fact and noted in the policy application that the firm was not “aware of any fact, circumstance, or situation which might reasonably be expected to give rise to a claim.”

After the entry of the death penalty order, Wade Welch learned for the first time of the discovery dispute and the sanctions motion and order.  He then notified OneBeacon of a potential malpractice claim.  OneBeacon acknowledged the claim.

In June 2008 the Welch Firm informed OneBeacon that RMG had made a demand of $105,800,000 to DISH to settle the underlying lawsuit. In December 2010, DISH requested that OneBeacon make its policy limits available for a potential settlement with RMG and in June 2011 DISH offered to settle and release the Welch Firm in exchange for OneBeacon’s policy limits.

OneBeacon responded in August 2011 and declined DISH’s settlement offer.  OneBeacon then rescinded the Welch Firm’s policy and filed suit seeking a declaration that the prior-knowledge exclusion in its exclusion barred coverage.  The Welch firm counterclaimed, and DISH intervened.  In the interim, DISH demanded arbitration against the Welch firm for malpractice.

The parties filed motions for summary judgment, including cross-motions regarding the policy’s prior-knowledge exclusion.  The Welch Firm argued that the court should enforce the prior-knowledge exclusion only if a reasonable attorney with defense counsel’s subjective knowledge at the time of application could have reasonably expected his acts, errors and omissions could lead to a malpractice claim.  The trial court agreed and rejected OneBeacon’s argument that the that the prior-knowledge exclusion should be read in isolation.  The court found ruled that it must consider the context of the policy as a whole, because to do so would render the policy’s retroactive coverage illusory.

The case proceeded to trial and based on this standard, a Houston jury found that the prior knowledge exclusion did not bar coverage, because OneBeacon had not shown that a reasonable attorney, given defense counsel’s knowledge in December 2006 − the date of the first application for coverage − could have reasonably expected his actions to result in a malpractice claim.  The jury awarded the Welch Firm $33 million, which the district judge reduced to $28 million.

On appeal, the Fifth Circuit upheld the trial court’s ruling on the prior-knowledge exclusion.  The court found that the prior-knowledge exclusion must be read in conjunction with the required disclosures in policy application and that the exclusion applied only to a claim arising out of a wrongful act that the insured could reasonably foresee at the time of the application would result in a claim.  The court of appeals clearly rejected OneBeacon’s arguments, holding:

The district court could not apply the literal policy language because of the extreme overbreadth of the wrongful act definition used in the exclusion: ‘any actual or alleged act, error, omission or breach of duty arising out of the rendering or the failure to render professional legal services.’  On its face this covers every single thing an attorney does or does not do, wrongful act or not. As written, then, the exclusion renders the coverage illusory and is facially absurd.”

Impact:  Insurers issue claims-made policies on many different policy forms, and these policies often include endorsements that alter the terms of the core policy firm.  In Welch, OneBeacon issued a policy where the prior-knowledge exclusion was so broad that it subsumed the coverage afforded by the main policy form.  The insurer has control over the wording of its policy, and in this case it issued a policy with contradictory terms and then tried to enforce it in a way that made the coverage illusory.  It paid a price for doing so.

Policyholders with claims-made coverages should take note of this decision.  It is important to review your policy form at renewal and to focus on the key timing elements of claims-made forms – the retroactive date in the policy, the terms of the grant of the “claims-made” coverage, the reporting requirements in the policy, and the exclusions.  The insured also should compare the representations it is asked to make in its application to the terms and exclusions in the policy to make sure that the coverage offered is consistent with the insured’s expectations.

Look for future posts here on the topic of claims-made policies.