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Page 1 Recording of this session via any media type is strictly prohibited. Page 1 Insurance 101 Understanding and Interpreting Your Policies Denver, Colorado.

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Presentation on theme: "Page 1 Recording of this session via any media type is strictly prohibited. Page 1 Insurance 101 Understanding and Interpreting Your Policies Denver, Colorado."— Presentation transcript:

1 Page 1 Recording of this session via any media type is strictly prohibited. Page 1 Insurance 101 Understanding and Interpreting Your Policies Denver, Colorado April 29, 2014

2 Page 2 Recording of this session via any media type is strictly prohibited. Insurance 101 Lawrence A. Hobel Partner, Covington & Burling LLP Lorin Klein Risk Management, Senior Risk Engineer, Whirlpool Corporation Lorin Klein manages the loss control engineering services for Whirlpool as well as manages day to day loss control activities for Whirlpool worldwide, including Business Continuity Planning and addressing critical exposures for the company. Lorin was previously employed by several large commercial property insurance carriers handling large commercial risk accounts as both an engineer and underwriter. He has experienced large property claim losses from both the insurer and insured sides of the business. Jaco Sadie Managing Director, Insurance Claim Services, FTI Consulting Lawrence Hobel advises domestic and international clients on policyholder coverage and complex environmental matters and litigation. Mr. Hobel has served as lead counsel in numerous major coverage actions, and has secured in excess of $1.5 billion dollars in insurance recoveries for extraordinary losses. He has represented policyholders in litigation and negotiations on a broad range of insurance recovery claims and coverage, including first party property damage and business interruption loss, D&O and E&O disputes, privacy and data breach claims, third party toxic tort, asbestos, product liability, and environmental liability coverage. He is listed in various publications of leading lawyers, including being ranked both nationally and in California by Chambers USA. J aco Sadie is a forensic accountant, based in San Francisco, and leads the west coast region of the Business Insurance Claims practice for FTI Consulting. Mr. Sadie has significant experience preparing complex property damage and business interruption claims. He has prepared claims for companies in the U.S., Asia, Latin America and Africa.

3 Page 3 Recording of this session via any media type is strictly prohibited. What to Expect Expectations Upon Completion of the Session Overview of Key Coverage Issues in First Party and Third Party Insurance Better Understanding of Interplay between Language and Outcomes Differences in First and Third Party Coverage Winning prizes

4 Page 4 Recording of this session via any media type is strictly prohibited. Agenda Policy Formation First Party Property Insurance: The Basics Third Party Insurance: The Basics Managing the Loss Resolving Insurance Coverage Disputes Disclaimer: The presentation is not intended to set forth the views of the participants on particular issues and may not accurately reflect such views and is not intended to represent the views of FTI, Covington or Whirlpool

5 Page 5 Recording of this session via any media type is strictly prohibited. Policy Formation – The Application Law generally imposes a duty to communicate in good faith to the insurer material facts within insured’s knowledge  Materiality may be determined by test (e.g., subjective test – materiality determined solely by the probable and reasonable influence of facts upon that insurer’s underwriting decision)  Watch out for provisions in application (or under law) to communicate material changes to answers before policy issued Some answers to questions on insurance applications may be deemed material as a matter of law:  Answers to specific questions asked by the insurer (courts split)  Insurers seek to establish materiality by so stating in application or policy: (e.g., “Any statements in the Application and in any materials provided shall be deemed material...”)

6 Page 6 Recording of this session via any media type is strictly prohibited. Policy Formation – The Application Insured may defend claims of misrepresentation/concealment, such as where:  The inquiry or question was vague or ambiguous  The insurer discovered contrary information through independent investigation before issuing the policy – triggering insurer “duty of further inquiry”  Insurer cannot play “gotcha” Insured does not warrant accuracy of statements “on information and belief” (unless information comes from sources under the insured’s control)

7 Page 7 Recording of this session via any media type is strictly prohibited. Rescission of Policy by Insurer Rescission: right, typically exercisable by the insurer, to extinguish the insured’s contract rights based on: False representations or concealment of material facts in application  Burden of proof is on the insurer to establish a (i) false representation or concealment and (ii) materiality May not have to be related to risk for which loss occurred Should require Insurer to pay back premiums

8 Page 8 Recording of this session via any media type is strictly prohibited. Reformation of Policy Reformation: equitable remedy that allows courts to rewrite policies that fail to conform to the parties’ prior agreement Requirements:  Antecedent agreement as to which there was no mistake  Insurance policy with materially different terms, resulting from: Fraud Inequitable conduct Mutual mistake o Unilateral mistake not sufficient

9 Page 9 Recording of this session via any media type is strictly prohibited. Policy Interpretation Plain language is applied where it is unambiguous. If ambiguous, the court considers the “reasonable expectations of the insured” or sometimes, reasonable expectation of the parties. Courts generally allow the use of extrinsic evidence to ascertain the insured’s reasonable expectations. Typically not uncommunicated intent. If the meaning of the provision does not appear from the plain language and the insured’s reasonable expectations cannot be ascertained, the policy is construed against the insurer (Contra proferentem). Insurers seek to impose more insurer favorable interpretative rules based upon (i) sophisticated insured; (ii) manuscript negotiations; and (iii) custom and practice and technical terms. Exclusions are generally construed narrowly. A matter of law for the Court, not an issue for the jury.

10 Page 10 Recording of this session via any media type is strictly prohibited. Key Principles of Insurance 1.Indemnity The insurance company indemnifies the insured against certain risks for a consideration known as premium. 2.Insurable Interest The loss of which will directly affect the insured. 3.Good Faith The concept that parties to a contract have an obligation of good faith and fair dealing. 4.Mitigation The insured will not behave irresponsibly and will take appropriate steps and actions so that the loss is minimized. 5.Subrogation The insurance company acquires legal rights to act on behalf of the insured as against third parties, i.e. the insurance company steps into the shoes of the insured. 6.Proximate Cause The cause of loss to ascertain whether the loss is covered under the policy.

11 Page 11 Recording of this session via any media type is strictly prohibited. Two Types of Insurance First Party Third Party

12 Page 12 Recording of this session via any media type is strictly prohibited. First Party Loss or Damage To Owned Property “All Risk” Property Damage Builder’ s Risk or Construction All Risk Boilers & Machinery Hull or Rig Physical Damage Vehicles/Mobile Equipment Aircraft Cargo Operator’s Extra Expense (Well Control) Flood Quake Windstorm Terrorism Cyber Political Risk Fidelity and Crime/Theft

13 Page 13 Recording of this session via any media type is strictly prohibited. First Party Loss of Revenue or Profit Business Interruption (from damage to owned property) Loss of Production Income (manufacturing) Delay in Start Up (for construction project) Loss of Hire (for rigs or vessels)

14 Page 14 Recording of this session via any media type is strictly prohibited. Third Party Liability: Injury to Employees Worker’s Compensation Employer’s Liability U.S. Longshoremen & Harbor Workers Maritime Liability/Jones Act Non-Subscribers’ Liability State Funds, where applicable

15 Page 15 Recording of this session via any media type is strictly prohibited. Third Party Liability to Others General Liability for Personal Injury or Property Damage Automobile Liability Directors & Officers Employment Practices Fiduciary Liability (pension plans) Environmental/Pollution Umbrella/Excess Liability Aviation Protection & Indemnity/Vessel Owner’s Liability Charter’s Liability

16 Page 16 Recording of this session via any media type is strictly prohibited. Funding and Premium Mechanisms “Old-Fashioned Way” (Fixed Amount, Subject to an Audit) Retrospective Premium Plans (Frequently not part of policy) Fronting Policies Captive Insurers and Reinsurers Deductibles or Self-Insured Retentions (SIRs) per Occurrence or Loss/Aggregate First Party Third Party

17 Page 17 Recording of this session via any media type is strictly prohibited. Issue: Once a first-layer excess policy’s aggregate limit has been exhausted, are the second- and higher-layer excess policies subject to a self-insured retention per occurrence for subsequent claims? Deere & Co. v. Allstate Ins. Co., San Francisco Super. Ct., No. CGC-03-420927 (Oct. 25, 2013) (Phase III) (yes; maintenance of underlying insurance provision in second-and-higher layers incorporate all but “the premium, the amount and limits of liability” from the first layer, and SIRs are not any of these) Kaiser Alum. & Chem. Corp. v. Certain Underwriters at Lloyd’s London, San Francisco Super. Cot., No. 312415 ( Oct. 11 & 31, 2001) (no, according to plain language in second-and-higher layers’ Limit of Liability provision; maintenance provision in those layers does not incorporate SIR contained in the first layer’s Limit of Liability provision) Controversy —How to Apply SIRs 17

18 Page 18 Recording of this session via any media type is strictly prohibited. 18 What happens when the policy provides for payment of a retrospective premium and claims are made by entities other than the disappeared entity? Transportation Ins. Co. v. Busy Beaver Building Centers, Inc., No. 11-907, 2013 U.S. Dist. LEXIS 121838 (S.D. Ohio Aug. 27, 2013)  Named insured had no duty to pay retros because parent company was only party who paid premiums and insurer did not negotiate right to seek from subsidiaries  Policy issued to Cyclops; BB a subsidiary which paid Cyclops for insurance coverage. BB later became stand-alone corporation and was sued for asbestos-related claims  Insurer provided coverage; BB knew at time it submitted claims that it was no longer owned by Cyclops  Court in SJ ruling: BB never bound by contract between insurer and Cyclops because BB not a successor  Cyclops responsible for retros Retrospective Premium Obligation

19 Page 19 Recording of this session via any media type is strictly prohibited. First Party Property Insurance: The Basics

20 Page 20 Recording of this session via any media type is strictly prohibited. Property Insurance Types of property typically insured:  Buildings  Equipment and contents  Personal property  Inventory Interest in property of others in the custody of insured (if there is an obligation) Types of property typically excluded:  Land  Water  Accounts, bills, deed, notes and evidences of debt  Animals, standing timber, growing crops  Dams and dikes

21 Page 21 Recording of this session via any media type is strictly prohibited. Property Insurance – Two Basic Types of Coverage "All risks of direct physical loss unless excluded"  Loss of tangible property  Loss of use of tangible property  Note that forms often are NOT standard "Named Perils" – E.g.,  Fire  Explosion  Collapse  Weather conditions  Computer virus  Riot  Smoke  Debris removal

22 Page 22 Recording of this session via any media type is strictly prohibited. Typical Property Insurance Exclusions The insurance company will not pay for loss or damage caused directly or indirectly by any of the following:  Earth movement (i.e., earthquake)  Flood  Enforcement of a law or ordinance  Wear and tear, erosion, corrosion, inherent defect, inherent vice  Mold/fungus  Pollution  Mysterious disappearance or unexplained losses  Nuclear reaction or nuclear radiation  Hostile or warlike action However, coverage may be added by endorsement or specific risk coverage

23 Page 23 Recording of this session via any media type is strictly prohibited. Exceptions to Typical Property Insurance Exclusions “If physical damage not excluded by this policy results, then only that resulting damage is insured.” Or "In the event that a 'specified cause of loss' results, the Company will pay for the loss or damage caused by that specified cause of loss.“ Typically referred to as Ensuing Losses

24 Page 24 Recording of this session via any media type is strictly prohibited. First Party Causation Issues Where All Risk Policy with exclusions or named perils policy, often dispute over whether cause is covered or excluded All Risk Policy – insurer bears burden of providing exclusion Named Perils – insured bears burden of proving covered What was Proximate Cause of Loss o New York: Not remote cause. An excluded cause does not bar coverage if it merely “set the stage for that later event.” Look to causes nearest the loss. o California: if two causes and one is covered and the other is not, then doctrine of efficient proximate cause. Efficient proximate cause is the predominant cause. Policies often contain concurrent causation clauses intended to eliminate or allocate loss where concurrent causes o Flood vs. wind loss

25 Page 25 Recording of this session via any media type is strictly prohibited. First Party Property Valuation Issues Can be very complex Replacement vs. Actual Cash Value Like Kind and Quality Upgrades/Code Requirements Co-insurance/Valuation

26 Page 26 Recording of this session via any media type is strictly prohibited. Property Insurance: Time Element Coverage Business Interruption Coverage (Time Element Coverage) Covers lost profits until some defined time after the loss occurs Complicated by interdependencies Be aware: The cost accounting or GAAP loss ≠ BI loss Important to anticipate potential business interruption losses and insure accordingly

27 Page 27 Recording of this session via any media type is strictly prohibited. Typical BI Insuring Agreement The insurance company will pay for Actual Loss Sustained by the Insured resulting directly from the necessary interruption of the Insured's business caused by a peril covered hereunder. Loss of Gross Earnings: Loss of Gross Earnings less all charges and expenses that do not necessarily continue during the interruption Loss of Gross Profit: The sum of the reduction in sales after a rate of gross profit was applied and the increase in cost of doing business – i.e., the additional expenditure necessarily and reasonably incurred for the sole purpose of avoiding lost sales

28 Page 28 Recording of this session via any media type is strictly prohibited. Period of Interruption Typically: Starts at the time of the physical damage Ending when, with due diligence and dispatch, the property could be repaired or replaced and made ready for operations Under the same or equivalent physical and operating conditions that existed prior to the damage

29 Page 29 Recording of this session via any media type is strictly prohibited. Period of Interruption Also called “period of restoration”, “loss period” or “period of indemnity” Theoretical vs. Actual Strikes, delay caused by insured not part of loss period (such as idle period or planned maintenance) Delay caused by insurer is part of loss period

30 Page 30 Recording of this session via any media type is strictly prohibited. Typical Exclusions From BI Coverage Increase in loss due to suspension or cancellation of contracts Indirect or remote losses Service interruption Law or ordinance Loss of market Planned or rescheduled shutdown Loss caused by damage to or destruction of finished stock

31 Page 31 Recording of this session via any media type is strictly prohibited. Enhancements to BI Coverage Some insureds may purchase coverage for losses resulting when events other than PD to insured's own property occur, e.g.,  Contingent BI coverage  Service interruption  Orders of civil authority  Denied (or impaired) access (ingress/egress)  Interdependencies  Extended period of indemnity coverage  Attraction properties

32 Page 32 Recording of this session via any media type is strictly prohibited. Business Interruption Quantification Issues Period of Indemnity and Extended Period of Indemnity Likely Experience if the Incident Did Not Occur Ordinary Payroll Coverage Idle Periods Make-up Depreciation Extra Expense (costs above normal to continue operations) Expediting Expense (costs to reduce loss) First Party – Business Coverage

33 Page 33 Recording of this session via any media type is strictly prohibited. Third Party Insurance: The Basics

34 Page 34 Recording of this session via any media type is strictly prohibited. General Liability Structures Primary Lower limits of Liability Limits can be per occurrence or annual Typically provides defense obligation and may not exhaust policy limits Excess May or may not “follow form” May contain additional exclusions Typically defense costs within policy limits (“Ultimate Net Loss”) Umbrella Higher limits of Liability Often broader coverage than primary Policy language less standard

35 Page 35 Recording of this session via any media type is strictly prohibited. Liability Coverage “We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ [or ‘personal injury’ or ‘advertising injury’] to which this insurance applies. Duty to Indemnify Covers Judgments and Settlements Consent to Settlement Settlement with Insurer for less than Policy Limits and Exhaustion

36 Page 36 Recording of this session via any media type is strictly prohibited. General Liability Coverage “We will have the right and duty to defend any ‘suit’ seeking [damages because of ‘bodily injury’ or ‘property damage’ [or ‘personal injury’ or ‘advertising injury’] to which this insurance applies], even if the allegations of the suit are groundless, false or fraudulent.” Duty to Defend and Duty to Pay Defense Costs The insurer is excused from its duty to defend only if the complaint against the insured “can by no conceivable theory raise a single issue which could bring it within the policy coverage”. If the insurer reserves its rights, it may have rights to seek reimbursement (after conclusion of the action) of defense expenses allocable solely to non-covered claims. Excess Policies and Payment on DWOPs

37 Page 37 Recording of this session via any media type is strictly prohibited. Liability Coverage Trigger Claims Made Coverage Claims Made Coverage focuses on Whether Claim is first made during the Policy period Claims Made and Reported also requires reporting during policy period Policies typically require notice of circumstances Can usually purchase “extended reporting period” May have a “retro” date

38 Page 38 Recording of this session via any media type is strictly prohibited. Liability Coverage Trigger Occurrence Issues Trigger is Occurrence during the Policy Period  “an accident, including continuous or repeated exposure to substantially the same general harmful conditions” Trigger and “long tail” injury  Exposure Theory – when exposed to product  Manifestation Theory – Bodily injury doesn’t occur (and insurance not triggered) until reasonably capable of medical diagnosis  Injury in Fact – Coverage is triggered when the actual injury is shown, retroactively, to have occurred, which can involve multiple policy years  Continuous Trigger – Injury is deemed a continuous process and all policies (from exposure to manifestation) are triggered Number of Occurrences  cause vs. effect

39 Page 39 Recording of this session via any media type is strictly prohibited. Liability Coverage – Allocation All Sums  Each triggered policy has an independent obligation to pay the full liability Pro-Rata  Loss is spread over triggered period  Typically, loss is spread even where no coverage (insolvent insurers, exclusions, SIRs) Horizontal vs. Vertical Exhaustion Policy Limitations Prior/Other Insurance/Other Company Insurance

40 Page 40 Recording of this session via any media type is strictly prohibited. Key Exclusions in GL Coverage Exclusions Not Third-Party Property Faulty Workmanship by the insured Claims covered under Workers Compensation Pollution Exclusions Intend/ Expect

41 Page 41 Recording of this session via any media type is strictly prohibited. The case law continues to develop as to the rights of claimants to pursue dissolved entities to the extent of insurance coverage Issues respecting rights where corporation law of jurisdiction has a sunset provision Issues respecting whether requires dissolved entity to come back to life in some way or simply allows suit be brought against insurer Issue respecting whether liability of successor for dissolved corporation Claims Against a Disappeared Entity 41

42 Page 42 Recording of this session via any media type is strictly prohibited. Most policies contain an anti-assignment clause: no "assignment of interest under this policy" without the insurer's consent endorsed on the policy. Such clauses are generally valid and enforceable. Two exceptions have been asserted by Policyholders: Clause should not apply when liability is by operation of law  Where the transaction amounts to a consolidation or merger of the two entities  Where the purchasing corporation is a mere continuation of the seller  The transfer of assets to the purchase is for the fraudulent purpose of escaping liability for the seller’s debts Clause should not apply because once the injury or damage insured against has taken place, a policyholder could freely assign its rights to defense and indemnity for claims arising out of that damage or injury Successors and Coverage 42

43 Page 43 Recording of this session via any media type is strictly prohibited. Case Law Mixed on Assignability after loss The Henkel Rule (California Supreme Court)  No assignable chose in action because the duty had not been reduced to a sum of money due or to become due under policy  Assignment without consent only where (i) the claim had been reduced to a monetary sum; or (ii) the insurer was in breach of the policy and the assignment transferred the right to recover damages  California Supreme Court in Fluor considering whether Insurance Code section 520 warrants a different result – “[a]n Agreement not to transfer the claim of the insured against the insurer after a loss has happened, is void if made before the loss.” Some Courts have followed Henkel  E.g., Indiana Supreme Court, relying on reasoning of Henkel Other Courts have ignored or rejected Henkel  E.g., Trial Court in Ohio noting that Henkel was in “conflict with” precedent of Pennsylvania, New York, Delaware, Ohio and Connecticut, generally on the basis that the loss has occurred before the claim is reduced to judgment or the insurer is in breach Successor Issues 43

44 Page 44 Recording of this session via any media type is strictly prohibited. Directors and Officers and Professional Liability Coverage D&O Insurance Suits against Directors and Officers Securities actions against the Company Professional Liability Insurance (E&O) Suits alleging errors and omissions in professional work

45 Page 45 Recording of this session via any media type is strictly prohibited. D&O Coverage Why is D&O Insurance Necessary? Corporations typically have bylaws that obligate them to provide broad indemnity to their directors and officers It may be financially impossible for an insolvent corporation to indemnify It may be legally impossible for a corporation to indemnify derivative claims

46 Page 46 Recording of this session via any media type is strictly prohibited. Basics of D&O Coverage Side A Insure directors and officers when they are not indemnified Side B Insure corporations when they indemnify their directors and officers Side C Insure corporations for certain types of direct liability

47 Page 47 Recording of this session via any media type is strictly prohibited. Typical D&O Exclusions Wrongful Profit Deliberate Criminal or Fraudulent Act In fact vs. final adjudication – settlements Insured v. Insured (e.g., Claims brought by a disgruntled former director or officer) Severability Clause - the conduct of one individual will not be imputed to other individuals or to the corporate entity Prior Claims Regulatory Exclusions

48 Page 48 Recording of this session via any media type is strictly prohibited. E&O Basics Coverage for Loss Resulting from a Claim made (and reported?) during policy period For a “Wrongful Act” In the rendering or failing to render “Professional Services” Covers claims of errors or omissions: negligence, misrepresentation, violation of good faith and fair dealing, wrong advice

49 Page 49 Recording of this session via any media type is strictly prohibited. Cyber Crime Insurance Coverage afforded under “traditional” policies and specialty ‘cyber’ policies Specialty ‘cyber’ policies could offer both first party and third party and cover:  Losses resulting from data breach, such as defense and indemnity costs relating to third party action, notification costs, credit monitoring, public relations, forensic investigation and crises management  Regulatory investigations, fines and penalties  Losses resulting from a misappropriation of intellectual property  Losses resulting from transmission of malicious code or denial of third party to insured’s network  Cost to recover data  Business interruption  Extortion from cyber attackers

50 Page 50 Recording of this session via any media type is strictly prohibited.  Notice of Loss  Policy provisions on Proof of Loss and timing  Partial payment and advance payment  Limitations period  Examination Under Oath  Obligations of Insurer and Insured  Document Retention  Notice of circumstances  Notice of claim  “Tender” of claim  Duty to Communicate  Managing the Relationship  Consent to Settle  Document Retention Managing The Loss First Party Third Party

51 Page 51 Recording of this session via any media type is strictly prohibited. Reservation of Rights Insurer does not waive its rights to contest coverage even though the insurer agrees to provide some performance under the policy A policy defense (e.g., failure to give notice or cooperate) A coverage defense Third-Party Liability -- Once an insurer reserves its rights based on a coverage defense, the insured generally is entitled to independent counsel of its own selection (“Cumis” counsel)

52 Page 52 Recording of this session via any media type is strictly prohibited. Policy Provisions On Resolving Insurance Coverage Disputes First Party Third Party Selection of adjuster Arbitration and Litigation Provisions Choice of law (Bermuda, NY, English) Choice of forum (Canada, London, Singapore, Bermuda, NY) Selection of ADR organization and rules Managing conflicts among clauses

53 Page 53 Recording of this session via any media type is strictly prohibited. QUESTIONS Please complete the session survey on the RIMS14 mobile application. Lawrence A. Hobel Covington & Burling LLP San Francisco, CA lhobel@cov.com Lorin Klein Whirlpool Corporation Chicago, IL Lorin_A_Klein_jll@Whirlpool.com Lorin_A_Klein_jll@Whirlpool.com Jaco Sadie FTI Consulting San Francisco, CA jaco.sadie@fticonsulting.com


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