Hunton Insurance Recovery Blog

No policyholder wants to hear the word “rescission” in the context of an insurance claim. The reality, however, is that when policyholders complete applications for insurance, they are typically focused on obtaining the best policy terms for the best rate. Nuances about question wording, the breadth of the applicant’s representations or how a court may analyze the insurer’s questions or the policyholder’s answers usually take a back seat to the central importance of placing and renewing coverage at a realistic price. But once a claim is made, insurers look back at applications to assess the accuracy and completeness of all information received during the underwriting process, especially in signed applications. If the insurer discovers a misrepresentation, it can be used to rescind the policy, leaving the insured with no coverage. 

D&O, E&O, and other professional liability insurers often raise the insurability, or rather “uninsurability” loss defense. Consistent with our prior analysis of the ways the Ohio district court erred in assessing insurability, the Sixth Circuit’s recent decision in Huntington National Bank v. AIG outlines how courts should evaluate insurability defenses, particularly in the absence of public policy rendering a loss uninsurable.

We recently posted about Nevada becoming the first state to prohibit defense-within-limits provisions in liability insurance policies. Defense-within-limits provisions—resulting in what is called “eroding” or “wasting” policies—reduce the policy’s applicable limit of insurance by amounts the insurer pays to defend the policyholder against a claim or suit. 

Nevada recently became the first state to prohibit defense-within-limits provisions in liability insurance policies. Defense-within-limits provisions—resulting in what’s called “eroding” or “wasting” policies—reduce the policy’s applicable limit of insurance by amounts the insurer pays to defend the policyholder against a claim or suit. These provisions are commonly included in errors and omissions (E&O), directors and officers (D&O) and other management liability policies. This is in contrast to other policies, most commonly commercial general liability policies, which provide defense “outside of limits” where defense costs do not reduce the policy’s limit. 

On April 11, 2023, Maryland Governor Wes Moore signed into law the Child Victims Act of 2023, allowing Maryland to join the growing number of states to rejuvenate previously time-barred lawsuits by victims of child sexual abuse against public school boards, government entities and private institutions. The Act also increases the statutory cap on civil damages for child sexual abuse—damages against public school boards and government entities are capped at $890,000 per incident, while per-incident damages against private institutions, including independent schools, are capped at $1.5 million. Maryland follows other states, like California and New York, which paved a path for abuse victims to bring previously time-barred claims based on alleged abuse that occurred decades earlier. Maryland is the first state, however, to pass this type of statute with a lookback period of infinite duration—meaning there is no limit for how long ago the alleged abuse occurred, and the statutes of limitation for lawsuits based on future acts of abuse are eliminated. Other states, such as New York and New Jersey, created limited lookback periods (one or two years), during which survivors were able to file previously time-barred claims.  

An insurer for University of Southern California recently filed suit in California federal court against the university and a former gynecologist at USC’s Student Health Center seeking to rescind USC’s insurance policy.  The dispute concerns North American Capacity Insurance Company’s coverage obligations for hundreds of sexual abuse-based lawsuits brought against USC.  NACIC seeks, among other things, to rescind a policy it sold to USC based on alleged failures by USC to disclose material facts during the policy application process.  NACIC is also seeking to avoid its coverage obligations under the policy’s “Prior Known Acts” exclusion.

In what is an unfortunate sign of the times, Springpoint Senior Living, Inc. recently sued its insurers in New Jersey federal court claiming they abruptly stopped covering Springpoint’s defense costs after doing so for nearly a decade.  A copy of the complaint can be found here. Springpoint’s allegations are emblematic of a growing trend among insurers taking drastic measures to avoid coverage, which is no doubt in response to the tightening economic conditions and looming recession around the globe. 

Liability insurance typically affords broad defense coverage.  But insurers sometimes reserve their right to challenge the insured’s right to a defense, or even outright terminate the defense.  When this occurs after the insurer has been in exclusive control of the defense, some courts recognize that the consequences can be catastrophic for the insured defendant.  Insurers, therefore, may be estopped from denying coverage where doing so will prejudice the insured.  This is exactly what transpired in RLI Ins. Co. v. AST Engineering Corp., No. 20-214 (2d Cir. Jan. 12, 2022), where the Second Circuit affirmed the district court’s decision that an insurer’s attempt to withdraw the defense it had provided to its insured for three years would prejudice the insured.

It’s a cautionary tale of cyber fraud.  A title agent in a real estate transaction receives an email ostensibly from the mortgage lender providing instructions for transferring the loan proceeds into a settlement bank account.  After transferring the funds ($520,000), it becomes apparent that the transfer instructions came from an email address that was one letter off from the mortgage lender’s actual email address – it was a scam.  But it’s too late, the scammer has already withdrawn the funds from the settlement account and cannot be traced.

In American Reliable Insurance Company v. Lancaster, the Georgia Court of Appeals reversed the denial of a property insurer’s summary judgment motion concerning the insurer’s denial of a fire loss claim.  The basis of the denial was that the policyholders had failed to pay the policy premium.  The policyholders, Charlie and Wanda Lancaster, claimed that they had paid their policy premiums for several years to their insurance agent, Macie Yawn.  In October 2014, American Reliable mailed a renewal notice to the Lancasters notifying them that premium payments had to be made directly to the insurer.  After it did not receive payment from the Lancasters, American Reliable sent them a cancellation notice in December 2014, again notifying them that payments be made directly to the insurer.  The Lancasters denied having received either notice from American Reliable, but the record included a receipt for certificate of mailing.

Deciding that certain damages claimed by the underlying case plaintiff were covered “Loss” under a professional services policy, the Eleventh Circuit determined that AEGIS must pay to defend a Georgia landlord in a class action for wrongful failure to return tenants’ security deposits under O.C.G.A. § 44-7-35(c).  The policy defined “Loss” as “a compensatory monetary amount for which the Insured may be held legally liable, including judgments . . . awards, or settlements,” but specifically excluded:

An appeals court has overturned an insurer’s successful dismissal of an insurance coverage lawsuit arising from the insurer’s refusal to defend a North Carolina assisted living operator in a False Claims Act lawsuit alleging more than $60 million in damages. The court held that that the insurer improperly denied coverage under the operator’s professional liability policy (covering “damages resulting from a claim arising out of a medical incident”) because the alleged improper billing had a causal connection to the operator’s failure to render medical professional services and, therefore, “arose out of” a covered medical incident.

On February 13, 2020, a Texas federal court granted summary judgment in favor of coverage, finding the policyholder provided sufficient notice to its insurer of a potential claim for damages caused by allegedly contaminated proppant used at a well site in west Texas.  See Evanston Insurance Company v. OPF Enterprises, LLC, Civil Action No. 4:17-CV-2048 (S.D.T.X. Feb. 13, 2020) (Dkt. No. 51) .  The Court found that the policyholder’s notice of a potential claim was effective when provided to the insurer’s agent, even though it was not provided directly to the insurer itself.

A Michigan federal court held recently in Great American Fidelity Ins. Co. v. Stout Risius Ross, Inc., et al., 2020 WL 601784, at *1 (E.D. Mich. Feb. 7, 2020), that an insurer must defend an investment advisor against lawsuits alleging that it fraudulently overvalued the stock of a company destined for bankruptcy.  The court determined that the insurer failed to show that an exclusion barring coverage for claims arising out of ERISA and other securities laws violations was broad enough to bar coverage for accompanying common law claims of fraud and negligent misrepresentation.

Ruling on cross motions for summary judgment, a federal court in New York held that AIG Specialty Insurance Company (AIG) must cover the settlement of an underlying action against its insured, SS&C Technologies Holdings, Inc. (SS&C), who was duped by e-mail scammers to issue millions in wire transfers.  The court rejected AIG’s assertion that the loss resulted from SS&C’s exercise of authority or discretionary control of client funds where SS&C only had limited administrative authority and further held that, even if SS&C had exercised the requisite authority, the exclusion was ambiguous.  A copy of the court’s decision can be found here.

Insurance companies frequently raise the so-called “dishonesty” exclusion that is typically found in most professional liability and directors and officers insurance policies.  Last week, the U.S. Court of Appeals for the Sixth Circuit took a substantial step toward curtailing that practice.  In a coverage dispute with eight-figure implications, the appellate court found in favor of the policyholder and ruled that publishing false statements does not equate to dishonesty and thus is not sufficient to support application of a dishonesty exclusion.

The Delaware Superior Court recently held, in Conduent State Healthcare, LLC v. AIG Specialty Insurance Company, et al., that a government-conducted civil investigation constitutes a “Claim” sufficient to trigger coverage under a professional liability insurance policy. Conduent State Healthcare, LLC (“Conduent”) alleged that Defendant AIG Specialty Insurance Company (“AIG”) breached its obligations by refusing to defend and indemnify Conduent for costs incurred in connection with a Medicaid fraud investigation.

On January 9, 2018, the Northern District of California held that the Nonprofits Insurance Alliance of California owed defense coverage to a pair of Scientology-based drug and alcohol rehabilitation centers for two lawsuits filed in Georgia and Oklahoma alleging that staff members had provided drugs and alcohol to patients, which resulted in injury and death. In Western World Ins. Co. v. Nonprofits Ins. Alliance of California, No. 14-cv-04466-EJD (N.D. Cal. Jan. 9, 2018), the court confirmed the broad scope of an insurer’s duty to defend under California law and rejected the insurer’s attempt to unreasonably expand the application of a “professional services” exclusion to avoid coverage.

This week, SEC Chairman Jay Clayton issued a statement on Initial Coin Offerings (ICO) addressing the legality, fairness, and risks associated with those offerings. Although the agency’s bulletin was one of many recent public statements by federal agencies on ICOs and cryptocurrencies generally, this new warning highlights additional issues and concerns with the ICO phenomenon that are particularly relevant to insurance coverage.

In Centurion Med. Liab. Protective Risk Retention Grp., Inc. v. Gonzalez, No. CV 17-01581 RGK (JCx), 2017 BL 392431 (C.D. Cal. Nov. 1, 2017), Centurion Medical Liability Protective Risk Retention Group sought a declaration that it owed no duty to defend a lawsuit alleging that its insureds—a group of medical practitioners—committed professional negligence during the delivery of a newborn child.  Centurion argued that it had no defense obligation because its insureds did not notify Centurion of the lawsuit within 20 days after it was filed, as required under the policy.

Last week, Golden Bear Insurance Company became the first admitted insurer approved by the California Department of Insurance to provide insurance coverage for marijuana companies. Golden Bear will now begin offering first- and third-party insurance coverage specifically targeting marijuana companies in the state.

In MF Global Holdings Ltd. et al. v. Allied World Assurance Co. Ltd. et al., No. 1:16-ap-01251 (Bankr. S.D.N.Y. Aug. 24, 2017), the United States Bankruptcy Court for the Southern District of New York ordered MF Global Holdings Ltd. and Allied World Assurance Co. Ltd. to arbitrate their $15 million errors-and-omissions coverage dispute in Hamilton, Bermuda. MF Global initiated an adversary proceeding against Allied World in the bankruptcy court after Allied World had refused to pay MF Global for amounts that MF Global returned to its customers' accounts as part of a settlement of claims against MF Global's former managers and directors. Allied World denied coverage under its "Bermuda Form" errors-and-omissions policy, claiming that this procedure was tantamount to deposit insurance, and not professional liability insurance, which is what errors-and-omissions coverage typically provides.

Technological advances like 3D printing and “sharing platforms” have increased business risk and, simultaneously, opportunities for risk-shifting between stakeholders. For example, 3D printing has exposed manufacturers to new risks associated with professional, product, IP and workplace liabilities, and the sharing economy (e.g., ride-sharing, home-sharing, car-sharing, etc.) has complicated traditional risk-sharing structures and insurance portfolios.  Attorneys Michael Levine and Andrea DeField discuss the primary issues policyholders need to consider ...

Private equity investors face unique challenges when procuring or renewing their liability insurance programs. For example, investors typically must complete lengthy applications or sign warranty and representation letters from their prospective insurers that inquire into knowledge by any potential insured as to any acts or omissions that could potentially give rise to a claim. These overbroad and often vague inquiries are problematic for private equity investors who would theoretically have to interview every employee, manager, or director at every subsidiary, fund, and ...

Bear Stearns' insurers were recently dealt a fatal blow, when the trial court granted Bear Stearns' motion for summary judgment and denied all insurers' motions (and defenses). See J.P. Morgan Sec. Inc. v. Vigilant Ins. Co., 2017 N.Y. Slip Op. 27127, 11 (N.Y. Sup. Ct. 2017). The court found that the documentary and testamentary evidence presented by Bear Sterns overwhelmingly demonstrated that Bear Stearns' misconduct profited their customers instead of resulting in Bear Stearns' own "ill-gotten gains." The court also found the settlement amounts reached by Bear Stearns in the SEC action and the private civil suits to be reasonable.

On February 22^nd, Hunton insurance team partner Syed Ahmad and Mary Borja of Wiley Rein LLP will be speaking at the DC Bar’s CLE program “What Every Litigator Should Know About Insurance and How It May Impact Your Case Strategy.” The two hour class will discuss what steps an insured should take to protect claims, the role of insurance in defending and settling claims, and how to preserve attorney-client privileges. To learn more about the event, please visit: http://bit.ly/2k8SCQT.

Date and Time:
Wednesday, February 22, 2017 from 6 pm to 8:15 pm

Location:
D.C. Bar Conference ...

On December 6, 2016, a Connecticut appellate court held that a contract exclusion in a public entity errors and omissions liability insurance policy did not relieve the insurer's duty to defend when there was at least a possibility of coverage based on the allegations against the insured. The court reasoned that the fact finder could determine that the underlying negligent misrepresentation claim may not have arisen out of contract, thereby putting the claim beyond the scope of the policy's contract exclusion.  For a more detailed analysis of the Town of Monroe v. Discover Prop. & ...

On November 2, 2016, a federal judge in California ruled that a Real Estate Property Managed endorsement in policies issued to a real estate manager negated a standard policy exclusion, but also rendered the policies excess to other available insurance. The case involved a dispute over coverage for a bodily injury claim involving “Pigeon Breeders Disease,” allegedly contracted due to the insured’s failure to keep pigeons away from a condo complex’s rooftop HVAC units. The plaintiff sued the property owners, Jerry and Betty Lee, and the property manager, Sierra Pacific Management Co. Inc. (Sierra Pacific).

An article by Hunton lawyers Walter Andrews and Mike Levine, titled Insurance Planning for 2016: Top Ten Real Estate Liability Concerns, was recently published in the Spring 2016 issue of The Real Estate Finance Journal. The article addresses ten recurring liability concerns facing real estate professionals, investors, developers, lenders, owners and managers, and the associated insurance issues. The article addresses ways commercial insurance can be used to mitigate potential liability for those involved in complex real estate transactions. Andrews and Levine, along with ...

On March 18, 2016, a Florida jury awarded Hulk Hogan (real name Terry Bollea) $115 million in damages in his lawsuit against Gawker.com. Mr. Bollea sued Gawker in Florida state court after it published portions of a video showing him having sex with the wife of a former friend, Todd Clem (a DJ better known as Bubba the Love Sponge). Mr. Bollea claimed he did not know he was being filmed and sought $100 million. He claimed, among other things, that his “goodwill, commercial value, and brand [were] substantially harmed” and that he suffered emotional distress by the posting. Following trial, the jury deliberated for six hours and awarded more than the amount sought: $55 million for economic harm and $60 million for emotional distress. On March 21, 2016, the jury awarded an additional $25 million in punitive damages.

On Monday, a Tennessee jury awarded $55 million to FOX sportscaster Erin Andrews in her suit against Michael Barrett, her stalker, and the Marriott hotel where they both stayed. In 2008, Mr. Barrett secretly videotaped Ms. Andrews through a peephole as she changed clothes in her hotel room. Hotel staff had revealed that she was staying at the hotel and, upon Mr. Barrett’s request, gave him a room next to hers. Mr. Barrett’s surreptitious video of Ms. Andrews was later made public. Ms. Andrews sued Mr. Barrett, West End Hotel Partners, LLC (the owner/franchisee of the hotel) and Windsor Capital Group, Inc. (the operator of the hotel) for negligence, invasion of privacy, and infliction of emotional distress causing embarrassment. The jury found the hotel’s owner and operator 49% at fault, comprising approximately $27 million of the total verdict.

Hunton & Williams LLP attorneys Mike Levine and Matt McLellan, along with Tim Monahan of Lockton Companies, LLC., presented to a group of risk managers and insurance professionals on Wednesday evening, February 17^th, about strategies and pitfalls in the claim presentation process. The event was well-attended and the audience was lively with questions for the presenters. A copy of the PowerPoint can be downloaded here. Key points discussed with the group include:

On July 28, 2015, the New York Supreme Court in Navigators Insurance Company v. Sterling Infosystems, Inc., Index No. 653024/2013, (N.Y. Sup. Ct. July 28, 2015), held that Navigators Insurance Company must defend and indemnify its policyholder for claims seeking statutory damages under the Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681 et seq., despite a policy exclusion for claims involving “[f]ines, penalties, forfeitures or sanctions.”  The decision may have broad implications for policyholders pursuing coverage for the defense of lawsuits seeking statutory damages under privacy and consumer credit statutes, as well as other statutes that have traditionally been viewed to be punitive in nature.

On July 28, 2015, the New York Supreme Court in Navigators Insurance Company v. Sterling Infosystems, Inc., Index No. 653024/2013, (N.Y. Sup. Ct. July 28, 2015), held that Navigators Insurance Company must defend and indemnify its policyholder for claims seeking statutory damages under the Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681 et seq., despite a policy exclusion for claims involving “[f]ines, penalties, forfeitures or sanctions.”  The decision may have broad implications for policyholders pursuing coverage for the defense of lawsuits seeking statutory damages under privacy and consumer credit statutes, as well as other statutes that have traditionally been viewed to be punitive in nature.