exhaustion & below limits settlements

Exhaustion & Below Limits SettlementsPresented By:

Samantha M. Evans

February 25, 2014

For Discussion and Educational Purposes Only

• Insurance program comprised of multiple layers of follow form insurance policies

• Coverage dispute between an insured and lower level insurer settles for less than full limit of liability

• Attempts to “fill the gap” left by the settlement before seeking higher level excess coverage

Overview

Issues to Watch • Does the applicable excess policy contain

ambiguous language, or language the court deems ambiguous?

• Is “actual payment” required and, if so, who may make that payment?

• Will public policy favoring settlements change the outcome for an excess insurer?


Below Limits SettlementsZeig v. Massachusetts Bonding & Ins. Co., 23 F.2d 665

(2d Cir. 1928)• Courts focus on specific policy language in the

excess policies

• Excess policy required that underlying insurance be “exhausted in the payment of claims to the full amount of the expressed limits.” (emphasis added)

• No need to interpret “payment” as “payment in cash”


Zeig: Below Limits Settlements

• “Payment” interpreted broadly to mean “satisfaction of a claim by compromise, or in other ways.”

• Permitted insured to fill the gap then collect from excess Insurer

• Public policy against inhibiting settlement

• Excess insurer was only called on to pay that portion of loss in excess of underlying limits


Zeig: Below Limits Settlements• New York courts, as well as some courts in other

jurisdictions, adhere to Zeig where policy language is ambiguous, permitting access to excess coverage if the insured’s obligations exceed the underlying limits

– See e.g., Lexington Ins. Co. v. Tokio Marine and Nichido Fire Ins. Co., 2012 WL 1278005 (S.D.N.Y. Mar. 28, 2012) (applying Zeig to find that “in the absence of unambiguous language requiring exhaustion via full payment of the underlying policy, no such exhaustion is required”).


Recent Trend: Second Circuit Distinguishes Zeig

Ali v. Fed. Ins. Co., 719 F.3d 83 (2d Cir. 2013)

• Held: Underlying Limits must actually be paid in full before excess policies attach

• Court focused on policy language, which left open who must pay

• Exhaustion occurs “solely as a result of payment of losses thereunder.”

• Obligations versus actual payment


Recent Trend: Second Circuit Distinguishes Zeig Ali v. Fed. Ins. Co., 719 F.3d 83 (2d Cir. 2013)

• “Payment of losses” refers to the actual payment of losses, and not the mere accrual of losses in the form of liability

• While containing similar “payment” language:

– Zeig arose under a first-party policy

– Liability excess carriers have “good reason to require payment up to the attachment point of the relevant policies, thus deterring the possibility of settlement manipulation.”


Liability Alone Insufficient Estate of Bradley v. Royal Surplus Lines Ins. Co., 647 F.3d

524 (5th Cir. 2011)

• Excess policy required that the underlying insurance be used in the payment of judgments or settlements

• Fifth Circuit rejected insured’s claim that “the mere entry of a judgment that exceeded the limits of the underlying insurance” was sufficient

• Instead, the Fifth Circuit enforced the policy language requiring actual payments to exhaust the SIR and the underlying policy’s limits


Very Recent Trend: Quellos Group

Quellos Group LLC v. Federal Ins. Co., 312 P.2d 734(Wash App. 2013)

• Two excess policies required: 1) underlying insurers to “have paid in legal currency the full amount”; 2)”actual payment of loss”

• Unambiguous language requires “actual payment”

• Not a condition to coverage

• Great American Ins. Co. v. Bally Total Fitness Holding Corp., 2010 U.S. Dist. LEXIS 61553 (N.D. Ill. 2010)


What Constitutes “Actual Payment”?

• Courts will enforce excess policy language which specifically requires the underlying carrier to “have paid, in the applicable legal currency, the full amount of the underlying limit”– Great American Ins. Co. v. Bally Total Fitness Holding Corp.,

2010 U.S. Dist. LEXIS 61553 (N.D. Ill. 2010)• Less specific policy language may yield a different

result – If the excess policy does not specify the manner in which

payment may be accomplished, the execution of a promissory note in the context of a partial settlement can constitute “actual payment”

– Chartis Specialty Ins. Co. v. Queen Anne HS, LLC, 867 F. Supp. 2d 1111 (W.D. Wash. 2012)


Trinity Homes, LLC v. Ohio Cas. Ins. Co., 629 F.3d 653 (7th Cir. 2010)

• Insured settled with multiple primary carriers for approximately 75% of the policies’ limits, and paid the remainder of the limits

• Umbrella carrier denied coverage, arguing that the primary policies were not “completely exhausted” or “otherwise unavailable” as the umbrella policy required

• Seventh Circuit found that the policy was ambiguous because it did not “clearly provide that the full limit must be paid out by the CGL carrier alone.”

Who May Pay?


Are Payments for Defense Costs “Judgments or Settlements”?

Siltronic Corp. v. Employers Ins. Co. of Wausau, 921 F. Supp. 2d 1099 (D. Ore. 2013)

• Question: when excess policies require exhaustion by “payment of judgments or settlements”, can the underlying policy be exhausted by defense costs?

• Court considered “judgments or settlements” language, finding that it includes payments made pursuant to consent decrees, even if those decrees or orders are not “final,” but that defense payments do not constitute exhaustion via “judgments or settlements”


Are Payments for Defense Costs “Judgments or Settlements”?

• Delaware Supreme Court recently held that the phrase “payments of judgments or settlements” cannot be construed to encompass an insured’s own payment of defense costs.

• “Judgments” refer to a decision by an adjudicative body as to the parties’ rights, and “settlements” involve agreements between parties as to the dispute between them.

• Defense costs do not fall within the meaning of either term.

• Intel Corp. v. American Guar. & Liab. Ins. Co., 51 A.3d 442 (Del. 2012) (applying California law).


Public Policy May Not Carry the Day

• Excess policy required payment of the full amount of its $15 million limits, but primary paid only $10 million

• Sixth Circuit enforced excess policy’s plain language, finding that Goodyear’s settlement public policy argument was “meritless”

• Goodyear v. National Union Fire Ins. Co., 694 F.3d 781 (6th Cir. 2012); Qualcomm, Inc. v. Certain Underwriters at Lloyds, 161 Cal. App. 4th 184 (2008)


Lesson: Policy Language Matters

• In the absence of the clear policy language interpreted in the foregoing cases, courts may reach a different result

• If the excess policy does not specify the entity which must make the underlying payments, courts may permit insureds to “fill the gap”


Policy Language Matters

Maximus, Inc. v. Twin City Fire Ins. Co., 856 F. Supp. 2d 797 (E.D. Va. 2012).

• Insured settled for less than limits with underlying carriers, and “filled the gap” for the remaining limits, and excess carrier denied coverage

• Held: policy was ambiguous

• Excess policy language did not specifically require the underlying insurers to pay, nor preclude the insured from filling the gap

• Excess coverage could be triggered by the insured settling for less than limits and then filling the gap.


QUESTIONS?

Samantha M. EvansAssociate, Global Insurance Department 215-665-4106 | [email protected]

www.cozen.com

Contact Information

Recent Statutes Addressing Coverage for Construction Defects: Update on Legislation and Effective Claim Management PracticesPresented By:

Richard C. Mason, Esq.Cozen O’Connor New York/Philadelphia [email protected](215) 665-2717

mailto:[email protected]

Overview1. Division in courts regarding defective construction as an “occurrence”

2. New statutes declaring construction defects to be an “occurrence”

3. Court challenges to new statutes

4. Legal issues once an “occurrence” has been found (or deemed) to occur

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Traditional General Contracting

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Surety

Owner Architect/Engineer

General Contractor

Surety Subcontractor

Material

Supplier

Sub-Contractor


Risk Transfer Illustration

Owner

(Prime Contract)

Tender E&O Insurer

Tend

ers

Architect /

Engineer

Indemnity Insurance /AI

General

(Subcontract) GL Insurer

Indemnity Insurance /AI

Subcontractor GL Insurer

Third Party Claimant

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“Occurrence”Typical Definition:

“An accident, including continuous or repeated exposure to substantially

the same general harmful conditions.”

Note: Standard CGL policies do not define the term “accident.”

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Decisions Finding No “Occurrence”Pennsylvania Damage that is the natural or probable

consequence of the work or supervision of the insured does not qualify as an accident.

Millers Capital Ins. Co. v. Gambone Bros. Development Co., Inc., 941 A.2d 706, 711 (Pa. Super. 2007)

NEBRASKA Faulty workmanship, standing alone, is

neither an “accident” or “occurrence.” Auto-Owners Ins. Co. v. Home Pride Companies, Inc., 684 N.W. 2d 571 (Neb. 2004)

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Courts Deeming Defective Construction to Constitute an “Occurrence”

Liberal construction of policy terms

Focus on business risk exclusions to eliminate moral hazard and other public policy concerns

Am. Family Mut. Ins. Co. v. Am. Girl, Inc., 673 N.W.2d 65 (Wis. 2004); U.S. Fire Ins. Co. v. J.S.U.B., Inc., 2007 WL 4440232 (Fla. 2007)

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Courts Deeming Defective Construction to Constitute an “Occurrence”

West Virginia Defective construction can be an “occurrence.”

Previous court decisions defined an “accident” in a policy as “not deliberate, intentional, expected, desired or foreseen.”

Court reasoned that the contractor did not deliberately intend or desire resulting damages.

Recognizing a “definite trend in the law” the court reversed long-standing precedent in the state.

Cherrington v. Erie Ins. Prop. & Cas. Co., 745 S.E.2d 508 (W.Va. 2013).

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Courts Diverge Over Whether Defective Construction is an “Occurrence”

Other Recent Decisions Seem to Expand the Potential Scope of Coverage Pennsylvania: Indalex v. National Union Fire Ins. Co., 201

WL G237312 (Pa. Super., Dec. 3, 2013) Georgia: Taylor Morrison Servs. V. HDI-Gerling American

Ins. Co., 746 S.E.2d 587 (Ga. 2013). Connecticut: Capstone Building Corp. v. Am. Motorists Ins.

Co., 2013 Conn. LEXIS 187 (Conn. Jun. 11, 2013).

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Nationwide Status of “Occurrence” Positions

for Construction Defect Claims

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Highest court or state statute deems defective construction to be an occurrence.

Leaning towards coverage; only lower state court or federal court authority exists.

Highest court has deemed defective construction not to be an occurrence.

Tending against coverage; only lower state court or federal court authority exists.

Defective construction only an occurrence when there is damage to third-party property.

Unclear

No decision


Insurance Coverage for ConstructionDefects: Statutory Developments

Between 2010 and 2011, four states enacted legislation addressing insurance coverage for construction defect claims.

Each statute favors coverage, albeit in different ways and to varying degrees.

These statutes signal that the battle over

whether construction defects constitute an "occurrence" may have shifted from the courts to state legislatures.

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Insurance Coverage for Construction Defects: Statutory Developments

New state statutes are intended to overrule, at least to some extent, judicial decisions that denied insurance coverage for construction defect claims.

The thrust of these statutes is to require

construction defects to be treated as an accidental "occurrence" within the meaning of the CGL insurance policy.

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State StatutesState Effective Date

Colorado May 21, 2010

Arkansas March 23, 2011

South Carolina May 17, 2011

Hawaii June 21, 2011

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Colorado: 2010 Statute The Builders’ Insurance Act, C.R.S. 13-20-808

codifies interpretive rules for occurrence based liability policies insuring construction professionals.

The Act allows courts to consider:

(1) an insured's objective, reasonable expectations concerning coverage; and

(2) insurance industry and internal insurance company explanatory materials to help interpret and apply certain policies.

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Colorado: 2010 StatuteProperty damage, including damage to

construction work performed by an insured, is presumed to be an "accident" unless the damage was intended and expected by the insured.

The Act applies to all insurance policies in existence or issued on or after the Act's effective date of May 21, 2010.

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Hawaii: 2011 Statute

Chapter 432, Article 1 of the Hawaii Revised Statutes provides that the term “occurrence” shall be construed in accordance with the law as it existed at the time that the insurance policy was issued.

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Hawaii: 2011 Statute This statute still leaves it to the courts to interpret the

applicable law with respect to any particular claim.

Preamble states: "Prior to the Group Builders decision ... construction professionals entered into … insurance contracts under the reasonable, good-faith understanding that bodily injury and property damage resulting from construction defects would be covered under the insurance policy. It was on that premise that general liability insurance was purchased.”

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South Carolina: 2011 Statute

South Carolina Code Section 38-61-70 enacted on May 17, 2011

Provides that CGL policies shall contain or be deemed to contain a definition of “occurrence” that includes property damage or bodily injury resulting from faulty workmanship, exclusive of the faulty workmanship itself.

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Arkansas: 2011 StatuteArkansas Code Section 23-79-155 (enacted on March 23, 2011)

Requires CGL policies offered for sale in Arkansas to contain a definition of occurrence that includes "property damage or bodily injury resulting from faulty workmanship“

Act also states that it does not limit the nature or types of exclusions that an insurer may include in a CGL policy.

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New State Statutes: Overview

Recent legislation generally will make it easier for policyholders in the affected states to establish potential coverage for a construction defect claim.

The statutes generally do not alter the exclusions that already apply to construction defect claims, and they leave the interpretation of the meaning of these exclusions to the courts.

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Insurer Challenges to Statutes: South Carolina

Harleysville Mutual filed a complaint in the South Carolina Supreme Court seeking injunctive relief and a declaration that the new statute violates the U.S. and South Carolina constitutions.

Court held: It is within the legislature’s power to define

“occurrence.” Provision in statute which applies new law

retroactively is unconstitutional.The remaining provisions of the statute are upheld

and its effective date is May 17, 2011.

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Post-Legislation Case law: South Carolina

Bennett & Bennett Construction, Inc. v. Auto Owners Ins. Co., 747 S.E.2d 426 (S.C. 2013).

Decided by South Carolina Supreme Court after it upheld the constitutionality of South Carolina Code Section 38-41-70.

“The plain language of exclusions j(5) and n each independently exclude coverage when, as here, a subcontractor acting on behalf of the insured directly damages the insured's work product, necessitating its removal and replacement.”

“[A] CGL policy does not insure the insured’s work itself but consequential risks that stem from the insured’s work. CGL coverage is for tort liability for injury to persons and damage to other property and not for contractual liability of the insured for economic loss….”

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Post-Legislation Case law: Hawaii Nautilus Ins. Co. Co. 3 Builders, Inc., 2013 WL 3223743 (D. Haw. Jun. 24, 2013).

Not a direct challenge to statute, but decided after Haw. Rev. Stat. § 431:1-217(a) was enacted.

Policy was in effect in 2008. The court did not follow Group Builders, Inc. and instead relied on 9th Circuit’s analysis in Burlington v. Oceanic, which was decided in 2007.

Following Burlington, as a matter of Hawaiian state law, construction defect claims do not constitute an occurrence under a CGL policy.

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Post-Legislation Case law: Hawaii Illinois National Ins. Co. v. Nordic PCL Construction, Inc., 2013 WL 3975668 (D. Haw. Jul. 31, 2013).

The court reasoned that even if § 431:1-217(a) nullified Group Builders by “restoring” pre-Group Builders law, the statute did not nullify pre-Group Builders decisions.

Following those decisions, construction claims do not involve accidents or “occurrences.”

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Insurer Challenges to Statutes: Colorado

Colorado Pool Systems, Inc. v. Scottsdale Ins. Co., 2012 WL 5265981 (Colo. App. Oct. 25, 2012).

Court recognized that if it were to apply C.R.S. 13-20-808, the CGL policy at issue would cover the insured’s defective workmanship, including the damage to insured’s own work.

However, the negotiation and execution of the policy, the faulty workmanship and resulting damage, and the denial of coverage all occurred before the statute’s effective date.

The court held that retroactive application of the statute was unconstitutional.

Court held that injuries flowing from the faulty workmanship were only an occurrence if the resulting damage was to non-defective property and were unexpected.

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Insurer Challenges to Statutes: Colorado

Colorado Pool Systems, Inc. v. Scottsdale Ins. Co., 2012 WL 5265981 (Colo. App. Oct. 25, 2012).

On September 3, 2013, the Supreme Court of Colorado granted a petition for writ of certiorari.

The court will address: Whether the court of appeals erred in holding

that CRS 13-20-808 would be unconstitutionally retrospective as applied to the CGL policy at issue

Whether the court of appeals erred in its interpretation of the CGL policy under common law

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Common Coverage Issues in Construction Defect Cases

The “legally liable” requirement

The “Your Product” exclusion

The “Your Work” exclusion

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The “Legally Liable” Requirement

CGL policies typically cover only “sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’…”

Precludes coverage for property damage for which the insured is obligated to pay damages by reason of the liability in a contract.

If the damage does cause a breach of contract, courts may find coverage only if Insured would have been liable anyway; i.e., damages were caused by the insured’s negligence.

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Nucor Silo Collapse, Port Lisas, Trinidad

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“Your Product” Exclusion Precludes coverage for “property damage” to “your

product” arising out of it or any part of it

“Your Product” means:

Any goods or products, other than real property, manufactured, sold, handled, distributed or disposed of by:

You;

Others trading under your name; or

A person or organization whose business or assets you have acquired; and

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“Your Product” Exclusion

“Your Product” may also mean

Warranties or representations made at any time with respect to the firmness, quality, durability, performance or use of “your product;” and

The providing of, or failure to provide, warnings or instructions.

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“Your Product” Exclusion■ Can bar claims by installers and

homebuilders …

■ But does it apply only to the actual component?

■ Can entire structure be deemed the “product?”

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“Your Work” Exclusion

“Your work” is defined as:

Work or operations performed by you or on your behalf; and

Materials, parts or equipment furnished in connection with such work or operations

Warranties or representations made at any time with respect to the fitness, quality, durability, performance or use of “your work”

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“Your Work” ExclusionLimitation The “Your Work” exclusion does not apply if

the damaged work or work out of which the damage arises was performed by a subcontractor.

Spears v. Smith, 690 N.E.2d 557, 560 (Ohio Ct. App. 1996).

Even if the work was performed by a subcontractor, plaintiff must allege that a subcontractor performed the work in order to trigger the duty to defend.

Pine Oak Builders’ Inc. v. Great American Lloyds Ins. Co., 279 S.W.3d 650 (Tex. 2009).

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Changing Times, Shifting Risks: SIRs and Large Deductible Policies

Deborah M. Minkoff Abby J. [email protected]@cozen.com 215.665.2170215.665.2761



Risk Management: Risk Retention and Transfer

• Insurance is risk management: risk retention and risk transfer.

• Thoughtful programs define the precise point at which the transfer occurs:

• on a per occurrence/per claim and aggregate level, • for defense (ALAE),• for damages (settlements and judgments).

• In today’s economic climate, many accounts are considering methods of cost-saving and risk retention.

• Insured accounts are working with brokers and underwriters to develop and implement risk retention and risk transfer objectives.

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• The challenge for insureds and the underwriters is to capture, in writing, the intended risk transfer protocol.

• The sophisticated insureds that use retention mechanisms are the same insureds that find themselves in litigation presenting issues involving multiple claimants, several defendants, additional insureds, and excess insurance.

• The precise risk transfer point impacts on each of these issues, in claims handling and claims resolution.

– The time to understand the risk transfer point is from the point when the claim comes in the door.

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Retention Mechanisms, Litigation IssuesThe Three Common Risk Retention Mechanisms:

DeductiblesMatching DeductiblesSelf-Insured Retentions

Discussion Steps:1. The characteristics of each risk retention mechanism2. Comparisons between the risk retention mechanisms3. Litigation topics (some warm, some hot)

1. Duty to defend2. Control of Settlement3. Satisfaction of SIR4. Impact of Insured’s Insolvency5. Allocation/Other Insurance

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Key Attributes: Deductibles

• Deductibles: most common type of risk retention mechanism.

• A deductible applies to damages, not defense. • The insurer defends upon “dollar one.”• A deductible sits within the policy’s limit of liability.

• The insurer “deducts” the retained amount from the damages it pays.

• If a large deductible is $500,000, and the policy limit is $1,000,000, the insurer’s indemnity obligation is $500,000.

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Large Deductibles: General Rules • Most of the same rules apply to large deductibles.

– The deductible does not relieve the insurer of its defense obligation.

– Insurer is obligated to defend additional insureds from notice.

– Insurer does not need insured’s consent to settle using the deductible.

– Insurer’s obligations remain intact if the insured is insolvent and not able to satisfy its deductible obligation.

– Defense costs usually erode a large deductible. • Collateral agreements: provide security if the insured does not pay deductible. Otherwise, insurer is in a “pay and chase” situation.

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Fronting Policies

• A deductible that matches the policy’s limit of liability is called a “matching deductible” policy or a “fronting policy.”

• Insureds are able to conduct business without meeting formal requirements for qualifying as a self-insurer. The insured has the benefit of the insurer’s filing and licensing, but retains all of the risk.

• Because a policy is issued, a fronting policy is interpreted as any other policy of insurance.

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Key Attributes: Self-Insured Retentions

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• An SIR is the amount of risk retained by the insured until “true” insurance is reached.

• The insured is required to exhaust the SIR before the insurer is obligated to respond in any way: to the defense, to indemnity demands, to tenders by additional insureds.

• For these reasons, courts analogize SIRs to primary insurance.

• An SIR sits below the policy’s limit of liability. If an SIR equals $500,000 and the policy limit is $1,000,000, the $1,000,000 limit applies over the SIR.


$1M Limit of Liability: Deductible vs. SIR

• $ 500,000 Deductible, $1,000,000 Limit

• $ 500,000 SIR,$1,000,000 Limit

1M 1M

LIMIT LIMIT

500K 500K

DEDUCTIBLE SIR

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SIR Considerations: Insured’s Perspective

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An SIR may be beneficial in situations where defense costs are more predictable, and the insured has sufficient assets to respond to claims management and liabilities/losses.

Cost of excess insurance can decrease with an increased attachment point.

A second-layer excess policy (excess of the layer above the SIR) can be less expensive than the umbrella/excess above a primary policy subject to the deductible.


SIR Considerations: Insurer’s Perspective:

No Initial Risk, And . . . • Downside to the insurer: little information from insured

on claims within SIR (change in frequency or severity)• “Timing” issues: when the insurer’s obligations begin and

end.– If multiple claims are brought against the insured, the

insurer’s defense obligation may arise mid-stream once the insured settles claims within the SIR. The insurer must know when its control begins.

– At the same time, the insurer may be asked to indemnify for a claim that exceeds the SIR. The insurer must keep abreast of when its obligations arise, and know when its obligations are exhausted.

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Comparing SIRs and Deductibles (subject to policy language)

SELF-INSURED RETENTION DEDUCTIBLE

Duty to Defend Insured responsible for defense until exhaustion of retained amount. Issue is whether defense costs erode SIR

Insurer’s duty to defend arises at “dollar one” (assuming prompt notice)

Indemnity Insurer has no obligation to indemnify, or pay on behalf of, until SIR is satisfied

Insurer obligated to pay deductible amounts and seek reimbursement (“pay and chase”)

Policy Limits Policy limits apply in excess of SIR Deductible sits within the policy limits

Additional Insureds

Additional insureds cannot seek coverage from insurer for defense or indemnity of claims within the SIR

Additional insureds can seek coverage from insurer under policy (defense) before deductible satisfied

“Insurance” May be considered “insurance” for certain purposes, particularly for vertical or horizontal exhaustion of policies issued to the same insured

Generally will not be considered “insurance” for any purpose

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Application Issue: Interpreting SIRs and Deductibles

• Large deductibles and SIRs are controlled by an endorsement. – Understand the endorsement in its entirety. If you

don’t understand, call the underwriter. – The title of the endorsement does not control.– Courts interpret the particular policy language to

effectuate the intended risk retention and transfer.

• Courts and some counsel often do not appreciate the differences. It’s your job to get (and keep) the judge on the right track.

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Litigation Issue 1:Defense Control Issues

• When a policy is subject to a deductible, the insurer has a duty to defend the insured from the time the claim is presented. See Zurich Specialties London Ltd. v. Century Surety Co., No. G042920, 2011 Cal. App. Unpub. LEXIS 7192 (4 Dist. Sept. 22, 2011).

• When a policy is subject to an SIR, the insurer’s defense obligation does not arise until after the SIR is exhausted by damages/settlements. See Axis Specialty Ins. Co. v. The Brickman Group, 458 Fed. Appx. 220 (3d Cir. 2012).

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Litigation Issue 2: Settlement IssuesThe Devil in the Details

– Insureds and insurers want to control how they spend their dollars.

– Insurer faces exposure if insured could, but doesn’t, settle within SIR (insured spends insured’s money).

– Insured faces exposure when insurer settles within high deductible (insurer spends insured’s money).

- General rule: The insurer controls settlement of claims within the deductible, even a high deductible, without the insured's consent. - American Protective Ins. Co. v. Airborne, Inc., 476

F. Supp. 2d 985 (N.D. Ill. 2007) (insurer did not need insured’s consent to settle using $1 M deductible).

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Settlement of Claims (High Deductible Policy)

- Roehl Transport Inc. v. Liberty Mut. Ins. Co., 784 N.W. 2d 542 (Wis. 2010).

- The insurer settled a third-party liability claim under high deductible policy. The insured established that the settlement was in bad faith. - (1) the insurer missed opportunities to settle for lower

amounts, and - (2) did not obtain the insured’s consent in violation of

the claims agreement.

Roehl take-away lessons: (1) Roehl signals that we will see more of this argument, and (2) policy language can require the insured’s consent to settle using a large deductible.

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Other Side of the Coin: Insured’s Failure to Settle

Issue: Insurer argues that insured caused exposure to insurer by litigating rather than settling within the SIR.

Older cases: insured has no duty to protect interest of insurer, although the insured must act within the bounds of “equity.” Safeway v. Int’l Ins. Co. v. Dresser Indus. Inc., 841 S. W. 2d 437 (Tex. App. 1992)

Insurers now use language giving the insurer the right to learn of,

and settle, claims that may exceed the insured’s SIR. N.Y. Housing Authority v. Housing Auth. Risk Retention Group, 203 F. 3d 145 (2d Cir. 2000); Methodist Hosp. v. Zurich Am. Ins. Co., 329 S. W. 3d (Tex. App. 2009).

Lesson: Check the SIR endorsement. 70


Litigation Issue 3: Payment/Satisfaction Issues

• Two payment satisfaction issues: (1) who can satisfy the retained amount, and (2) what payments satisfy the retained amount. Both are practical consequences of the deal struck.

• Typical context presenting the “who” issue: an additional insured may want to pay the retained amount to access the coverage.

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What Payments Satisfy the SIR• The policy language controls. Compare: Vons Companies Inc. v.

U.S. Fire Ins. Co., 92 Cal. Rptr. 2d 597 (Cal. Ct. App. 2000) (no restriction on who can satisfy the SIR) and Forecast Homes, Inc. v. Steadfast Ins. Co., 105 Cal. Rptr. 3d 200 (Cal. Ct. App. 4th Dist. 2010) (under SIR endorsement, additional insureds were not entitled to coverage unless the named insured satisfied SIR).

• This is a “warm” issue: general acceptance that the policy language controls.

• The Supreme Court of Florida recently permitted an insured to apply indemnification payments from a third-party to satisfy the policy’s SIR, even where the SIR endorsement required “payment of settlements, judgments, or ‘Claims Expense’ by you.” Intervest Constr. of Jax, Inc. v. Gen. Fid. Ins. Co., 2014 Fla. LEXIS 568 (Fla. 2014)

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What Payments Satisfy the SIR • Second “satisfaction” issue: do only judgments and settlements

satisfy the SIR, or do defense costs as well? – As the size of the SIR increases, the likelihood that the SIR will

be eroded by defense costs increases.

• The endorsement will specify if defense costs erode the SIR, or if the SIR applies only to damages.

• Defense costs that erode the retention amount (“inside”) accelerate risk transfer from the insured to the insurer.

• Defense costs outside the SIR slow down risk transfer to the insurer. – If the SIR applies only to damages, defense costs are borne by

the insured until the SIR is exhausted by damages.

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SIR Satisfaction Considerations • Considerations that bear on defense costs as “inside” or

“outside” the SIR:

• An insured that needs certainty in its uninsured exposure will look for defense costs within limits. The SIR serves a true cap.

• An insured that wants long-term control over claims will look for defense costs outside the SIR.

• An insurer that desires decreased exposure may insist on an SIR eroded by damages only.• ALAE may be outside the SIR but within (erodes) limits, or

vice versa. • Compare the insuring agreement to the SIR endorsement.

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Litigation Issue 4: Impact of Insured’s Insolvency

• Insolvency confounds many issues. Application of SIRs and deductibles is no exception.

• In the context of a high deductible policy, or a fronting policy, the insured’s insolvency does not change the insurer’s obligations. Under a high deductible or fronting policy issued to an insured that becomes insolvent, the insurer has to perform under the policy (defend and pay) even if the insured cannot reimburse the insurer for the deductible amount.

• General Rule: insurers are not required to “drop down” to satisfy an unpaid SIR. There is scant authority for the proposition that an insured’s inability to satisfy its SIR due to insolvency relieves the insurer of its obligations excess of the SIR.

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Litigation Issue 5:Allocation and “Other Insurance”

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Deductibles and SIRs add complexity to matters involving damage or injury that implicate multiple policies.

Two contexts: consecutive coverage and concurrent coverage. Allocation: When injury or damage spans consecutive policy

periods, courts must consider if/how the damages should be allocated across the policies.

Issue is whether the insured must pay a separate SIR/deductible for each triggered policy. Most courts find the insured must satisfy each policy’s

deductible or SIR. Only a few courts hold that the insured is responsible for a

single, pro-rated deductible.


Context Determines Result(dmm reconciliation)

• In the single insured/allocation context, SIRs qualify as “other insurance.” • Successive insurers get the benefit of the insured’s SIR

because each of these insurers issued policies to the same insured that decided to retain risk.

• In the “additional insured/other insurance” context, SIRs do not qualify as “other insurance.” • These insurers did not issue policies to an insured that

decided to retain risk. • Courts find that the insurers must respond to the risk

transferred by their own insured. • Policy language trumps the general rules

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Lessons Learned• Large deductibles and SIRs are becoming prevalent.

• Large deductibles and SIRs present challenges for claims professionals and their counsel.

– When an account or case is assigned to you, read the deductible or SIR endorsement.

– Determine the precise transfer point(s), including if defense costs erode the retention, and if/when the language gives the insurer the right to step in.

– As the claim progresses, re-visit the language to address issues involving payment and control of settlement.

– If stumped, call.

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Deborah M. Minkoff Abby J. [email protected] [email protected] 215.665.2761



Presented By:

Data Privacy Risk

Matthew SiegelAttorney At LawCozen O'Connor(215) [email protected]

Kurtis. E. SuhsPrivacy Practice LeaderIronshore (404) [email protected]





The Gravity of Cybersecurity

“The diverse threats we face are increasingly cyber-based. Much of America’s most sensitive data is stored on computers. We are losing data, money, and ideas through cyber intrusions. This threatens innovation and, as citizens, we are also increasingly vulnerable to losing our personal information. That is why we anticipate that in the future, resources devoted to cyber-based threats will equal or even eclipse the resources devoted to non-cyber based terrorist threats.”

- FBI Director James Comey


Who Is At Risk?• Individuals

• All types of companies:– Financial firms (37%)– Retailers and restaurants (24%)– Information and professional firms (20%)– Manufacturing, transportation and utility industries (19%)

• Governmental entities

There are now only two types of companies: Those that have been hacked and those that don’t know they’ve been hacked.


http://2.bp.blogspot.com/-HUaGutdK7-U/UQlJKrOoHEI/AAAAAAAAHUs/f9FWL5mnQSk/s1600/you12.jpg

What Type of Information Is At Risk?

• Personal • Corporate • Financial • Healthcare


Who Are The Perpetrators?• Insiders

– Malicious insiders– Unintentional mistakes

• Outsiders – Organized crime– Former employees– Contractors– State-affiliated entities– Hacktivists


Causes of Data Breaches• Advance Persistent Threats

– Internet Malware Infections • Drive by downloads• Email attachments• File sharing• Pirated software• Spear Phishing• DNS & Routing Mods

– Physical Malware Infections• Infected USB memory sticks• Infected CD’s and DVD’s• Infected memory cards• Infected applications• Backdoored IT equipment


Causes of Data Breaches• Advance Persistent Threats

– External Exploitation • Professional Hacking• Mass vulnerability exploits• Co-location Host Exploitation• Cloud Provider Host Exploitation• Supply Chain Partner Exploitation• Rogue Wi-Fi penetration

• Human Error


First Party Coverage

• Damage to Digital Assets• Business Interruption• Extortion• Privacy Breach Expenses


Third Party Coverage

• Privacy Liability• Network Security Liability• Internet Media Liability• Regulatory Liability • Contractual Liability


Why Cyber Risk Policies?• Each data breach is different• Prevention consultation

– Strong security decreases downstream costs• Assistance with incident response plans

– Incident response plans save $42/record (Ponemon)• Response consultation

– Consultants decrease costs and increase remediation effectiveness– Consultants can save $13/record (Ponemon)

• Crisis management and public relations to mitigate fallout


exhaustion & below limits settlements

Documents

excess policies excess

excess of underlying

underlying policy

applicable excess policy

excess insurer public

similar payment language

result of payment

payment of claims