Hunton Insurance Recovery Blog

An Ohio appellate court held last month that a cyberattack triggered coverage under a commercial property insurance policy in the case EMOI Services, LLC v. Owners Insurance Company, No. 29128, 2021 WL 5144828 (Ohio Ct. App. Nov. 5, 2021).  This is good news for policyholders in light of widespread cyberattacks over the last two years, and rising premiums in today’s cyber insurance markets. The decision also has wider implications, including in suits seeking coverage for losses caused by COVID-19 under property insurance policies.

The Central District of California recently rejected an attempt by Federal Insurance Company, a Chubb company, to avoid its duty to defend its insureds in an $8.5 million lawsuit with a former employee.

TriPacific Capital Advisors, LLC acquired Directors and Officers (D&O) coverage from Federal and Employment Practices Liability (EPL) coverage from Travelers Insurance Company. While those policies were in effect, a former TriPacific employee sued the company and its president, Geoffrey Fearns, for a variety of employment-related causes of action concerning his termination and compensation. TriPacific and Fearns tendered notice to both insurers, seeking indemnification and defense costs. Both policies contained a duty to defend.  While Travelers agreed to defend under a reservation of rights, Federal denied coverage based on multiple grounds, including its policy’s “other insurance” provision, contending that the provision rendered its policy “excess” to the Travelers policy.  Federal also argued that TriPacific had not satisfied the D&O policy’s $150,000 self-insured retention and, thus, coverage had not been implicated, in any event. TriPacific maintained that neither the SIR nor the “other insurance” provision pertained to Federal’s duty to defend and brought suit to enforce the duty to defend.

Earlier this month, current and former Boeing Company directors agreed to a $237.5 million settlement to resolve claims that they ignored safety issues concerning Boeing’s 737 MAX aircraft. While the settlement, which came quickly on the heels of the Delaware Chancery Court’s September denial of the defendants’ motion to dismiss, ranks as one of the largest derivative settlements of all time, the silver lining for the directors and officers named in the suit is that the entire settlement is to be funded by the company’s D&O insurers. The Boeing case is yet another example of the necessity for public companies to purchase sufficient D&O liability coverage, particularly “Side A” insurance coverage, to protect officers and directors implicated in derivative claims, securities class actions, enforcement actions, and similar claims. Because many states, including Delaware, prohibit companies from indemnifying officers and directors for payments made to the company in settlement of stockholder derivative claims or other suits brought on behalf of the company, securing Side A coverage to protect individuals for non-indemnified loss is essential.

Congratulations to Hunton Andrews Kurth LLP insurance recovery lawyer, Jorge Aviles, on his confirmation by the DC Bar Foundation’s Board of Directors to the organization’s Young Lawyers Network Leadership Council.

What Happened:

The Tenth Circuit held that, under Colorado law, an insurer did not need to cover a satellite television provider under two commercial umbrella liability policies in connection with a lawsuit alleging the company’s telemarketing practices violated the Telephone Consumer Protection Act (TCPA), 47 U.S.C. §227 et seq.

The Bottom Line:

This decision is a reminder that policy wording, as well as state law governing interpretation of insurance policies, varies greatly with respect to potential insurance coverage for alleged violations of the TCPA and similar statutes. While some states have characterized TCPA remedies as uninsurable penalties, it is not consistent across the country and policyholders therefore must review their policies carefully to determine the existence and scope of any TCPA coverage.

In addition, because the Tenth Circuit’s decision means that—in Colorado at least—claims for statutory damages under the TCPA may not be insurable, companies engaging in telephonic communications with consumers must ensure that they have robust TCPA compliant policies and procedures in place to further limit TCPA exposure.

Last month, the US District Court for the District of Connecticut granted an insurer’s motion for summary judgment in the case of Connecticut Municipal Electric Energy Cooperative v. National Union Fire Insurance Company of Pittsburgh, PA, No. 3:19cv839 (JBA), finding that there was no coverage under a directors & officers policy for defense costs associated with responding to a government subpoena. Last week, in line with our commentary, which highlighted several critical flaws in the court’s initial ruling, the court reversed itself and granted reconsideration, finding that there actually is coverage.

While policyholders have experienced a wide range of conflicting rulings related to COVID-19 business interruption losses, a recent Northern District of Illinois decision shows that the pandemic continues to present a range of exposures beyond business interruption losses, including for claims under directors and officers liability policies. In Federal Insurance Co. v. Healthcare Information and Management Systems Society, Inc., No. 20 C 6797 (N.D. Ill. Oct. 19, 2021), the court rejected the insurer’s broad reading of a professional services exclusion, contract exclusion, and the insurability of alleged restitution to deny coverage under a D&O policy for losses arising from a cancelled trade show.

On September 21, 2021 and October 15, 2021, the US Treasury Department’s Office of Foreign Assets Control (OFAC) issued reminders of the sanctions risks for facilitating ransom payments to designated malicious cyber actors.  As discussed in our prior blogpost on OFAC's October 1, 2020 advisory, OFAC has made clear that it is increasingly willing to bring enforcement actions against entities, including cyber insurers, that facilitate payments to sanctioned threat actors on behalf of corporate victims.

This guidance should serve as a reminder to policyholders that ransomware and other cyber incidents trigger stringent regulatory and reporting requirements and that policyholders should consider engaging experienced advisors to develop a cohesive response strategy when cyber incidents occur.  OFAC’s guidance also should remind policyholders to carefully scrutinize cyber insurance coverages (and others) to ensure they provide the broadest possible coverage for cyber risks while still following OFAC guidance.

It has taken a pandemic, but the fallacy of Couch’s “physical alteration” standard, accepted blindly by myriad courts nationwide in COVID-19 insurance disputes and beyond, has been revealed in an article co-authored by Hunton insurance partner, Lorie Masters, with substantial assistance from Hunton insurance associate, Rachel Hudgins.  The article, which received final publication in the American Bar Association’s TIPS Law Journal on October 26, 2021, makes a critical analysis of the landscape of judicial authority that existed when 10 Couch on Ins. § 148:46 (3d ed. 1998), the edition of Couch in which the standard first appeared, was published in the late 1990s.  The article then traces the evolution of that landscape through the beginning of the COVID-19 pandemic, when courts nationwide (predominantly federal courts), seized upon Couch’s standard as though it were a constitutional mandate. But as the article reveals, the standard is flawed, and thus the decisions that rely on it, infirm.

On Wednesday, Hunton Andrews Kurth LLP insurance partner Mike Levine testified before the Massachusetts Joint Committee on Financial Services in support of a bill that takes aim at insurers’ argument that their policies do not cover losses caused by COVID-19 or government-issued closure orders. Passage of H.1079 would give business owners in Massachusetts a fair chance to show otherwise: that their all-risk insurance policies, for which they paid substantial annual premiums, do indeed cover business income losses and extra operating expenses incurred because of the pandemic.