SDV Insights

Both state and federal courts across the country wrestled with insurance coverage for COVID-19 business interruption claims throughout 2021 with no foreseeable end in sight. That didn’t prevent courts from addressing a myriad of other interesting coverage dilemmas, stemming from ransomware incidents, Biometric Information Privacy Act claims, and SEC-ordered corporate disgorgements. What remains certain each year is that courts are tasked with interpreting thorny insurance coverage questions covering many different types of policies, both first-party and third-party, and involving complex and unique fact patterns. Having culled through many decisions, we now unveil the 10 most influential coverage decisions of 2021 and look ahead to equally significant decisions anticipated in 2022.

1. Citizens Prop. Ins. Corp. v. Manor House, LLC
313 So. 3d 579 (Fla. 2021)
Supreme Court of Florida
January 21, 2021

Is a first-party policyholder entitled to extra-contractual consequential damages for a breach of contract claim?

No, in this case a first-party policyholder is not entitled to extra-contractual consequential damages for a breach of contract claim. SDV has continued to monitor this decision due to its potentially broad implications for recovery available to policyholders. An insured owner of apartment buildings brought suit against its first party property insurer, Citizens Property Insurance Corporation, alleging breach of contract and fraud for the insurer’s failure to properly adjust a loss from Hurricane Frances in 2004. According to the owner, the insurer failed to timely and adequately adjust the loss, and pay undisputed amounts. Although a bad faith claim was barred by statute, the owner sought extra-contractual, consequential damages for lost rents due to the insurer’s conduct and delay. The Florida Supreme Court accepted the following certified question from the Fifth Circuit District Court of Appeal: “[I]n a first party breach of insurance contract action brought by an insured against its insurer, not involving suit under Section 624.155, Florida Statutes, does Florida law allow the insured to recover extra-contractual, consequential damages?” The court answered this question in the negative. The broader holding of this case, however, is that the Florida legislature enacted section 624.155 to establish a framework for a first-party bad faith cause of action, which allows for the recovery of extra-contractual damages against an insurer, and that absent a bad faith claim, extra-contractual damages are not recoverable. 

To learn more about this case, click here. 

2. RSUI Indem. Co. v. Murdock
248 A.3d 887 (Del. 2021)
Supreme Court of Delaware
March 3, 2021

Under Delaware law, is fraudulent conduct by corporate officers and directors insurable under a D&O policy?

Yes. The director, CEO, and other officers of Dole Food Company, Inc. were sued by Dole stockholders alleging breach of fiduciary duty by manipulating Dole’s stock price to facilitate a merger. This suit was consolidated with another suit by a separate set of stockholders, who sought appraisal of their shares. Following trial, the court issued a memorandum of opinion (as opposed to a final judgment, to avoid mooting the appraisal issue) finding, inter alia, that Dole’s officers breached their fiduciary duties. The parties then reached and entered into a settlement agreement without participation from Dole’s insurers. Before the settlement was approved, a federal securities class action was filed by former Dole stockholders who sold their stock before the merger, seeking damages against Dole’s officers and claiming violations of the Securities Exchange Act. The parties to this class action negotiated a settlement without the consent of Dole’s insurers, but before it was finalized, several of Dole’s excess insurers, including RSUI, filed suit seeking a declaration of coverage.

On appeal, the court first had to determine whether to apply California or Delaware law to this case with an insured incorporated in Delaware but headquartered in California. Applying the Second Restatement test, the court found Delaware had the most significant relationship to the case and applied Delaware law. Next, RSUI sought to avoid coverage for the stockholder action as a matter of public policy, stating that insurance should not be available for intentional wrongdoing. RSUI also sought to avoid coverage based on a “Fraud/Profit” exclusion that barred coverage for claims arising out of, inter alia, any profit to which an insured was not legally entitled, or any willful violation of statute, regulation, or other criminal conduct as established by a final and non-appealable judgment. The Supreme Court of Delaware disagreed with RSUI’s public policy argument, declining to void otherwise valid coverage on public policy grounds. The court then turned to the “Fraud/Profit” exclusion and, because both the stockholder action and the class action were settled without a final and non-appealable judgment, the “Fraud/Profit” exclusion did not apply.

To learn more about this case, click here. 

3. G&G Oil Co. of Ind. v. Cont'l W. Ins. Co.
165 N.E.3d 82 (Ind. 2021)
Supreme Court of Indiana
March 18, 2021

Is a voluntary payment to a hacker following a ransomware attack insurable under a commercial crime policy’s computer fraud coverage grant?

Yes, in many cases, ransomware attacks are covered by insurance. In this case, the insured was locked out of its computer system due to a ransomware attack and eventually contacted the hacker to negotiate a release of its servers by way of payment of four bitcoins valued at nearly $35,000. The insured thereafter submitted a claim for coverage under its policy, specifically under the commercial crime coverage part’s the “Computer Fraud” provision, which covered loss “resulting directly from the use of any computer to fraudulently cause a transfer of money.” The insurer denied, asserting that the insured declined computer hacking and computer virus coverage. Because the Bitcoin was voluntarily transferred, the hacker did not “transfer funds directly” from the insured. A declaratory judgment action was filed, and both parties moved for summary judgment. On appeal, the Supreme Court of Indiana concluded that the voluntary transfer of the Bitcoin was under duress and not so remote as to break the causal chain from the ransomware attack and thus “resulted directly from the use of a computer.” However, the court also examined the term “fraudulently cause a transfer,” and concluded that it was unambiguous and can be understood to mean “to obtain by trick.” The court noted that the evidence before it regarding the hacking’s initiating event was insufficient to determine whether the transfer had truly been obtained by fraud, or if the insured’s servers simply lacked adequate safeguards. Ultimately the case was remanded for further proceedings, but this is nevertheless a favorable opinion for policyholders who are subjected to ransomware attacks.

As the court recognized, the “interplay between computer fraud coverage and computer hacking is an emerging area of the law.” Given the diverging judicial opinions on this issue nationwide, crime coverage for hacking incidents will be dependent on the specific policy language as well as the unique facts of each case.

To learn more about this case, click here.

4. Hartford Cas. Ins. v. Liberty Mut. Fire Ins. Co.
No. 18-CV-0044, 2021 WL 1186759 (D.N.J. Mar. 30, 2021)
United States District Court, District of New Jersey
March 30, 2021

Is a primary insurer liable to an excess insurer for failure to negotiate settlement of a tort action within the primary policy’s limits?

Yes. This dispute arose following a trial verdict in an auto accident suit that exceeded the limits of a primary commercial auto liability policy. As a result, the excess insurer, Hartford Casualty Insurance (“Hartford”), brought suit against the primary insurer, Liberty Mutual Fire Insurance Company (“Liberty”), seeking damages for the total payments made under its excess policy and arguing that Liberty failed to negotiate in good faith with the claimant in the auto accident suit and settle within the primary policy limits prior to trial.

On cross motions for summary judgment, the court applied the three-prong test from the seminal Rova Farms case, finding that: (1) a jury could have potentially found liability for the third-party claimant, and the potential verdict could have exceeded the primary policy limit and (2) the third-party claimant was willing to settle within the primary policy limit, but that the third prong (whether the primary insurer negotiated in “good faith”) involved genuine issues of material fact which could not be resolved on summary judgment. Accordingly, the court held that the primary insurer “has a positive fiduciary duty” to act in “good faith” towards the excess insurer, i.e., “to take the initiative and attempt to negotiate a settlement within the [primary] policy coverage.” However, the court rejected the notion that alleged bad faith could be demonstrated in hindsight based on the trial verdict. Instead, the operative inquiry of whether negotiations were conducted in good faith depends on the facts known at the time of negotiations. Ultimately, additional factual findings were required, but this opinion provides valuable guidance on how bad faith negotiations may be proven.

To learn more about this case, click here.

5. W. Bend Mut. Ins. Co. v. Krishna Schaumburg Tan, Inc.
No. 125978 , 2021 WL 2005464 (Ill. Dec. May 20, 2021)
Supreme Court of Illinois
May 20, 2021

Mass. Bay Ins. Co. v. Impact Fulfillment Servs., LLC
No. 1:20CV926, 2021 WL 4392061 (M.D.N.C. Sept. 24, 2021)
United States District Court, M.D. North Carolina
September 24, 2021

Does a business owners’ liability insurer owe defense for alleged violations of the Illinois Biometric Privacy Act? 

Yes. According to the court in West Bend Mutual Insurance Company v. Krishna Schaumburg Tan, Inc. This decision is significant as it is one of the only decisions analyzing the scope of an insurer’s duty to defend in the context of a BIPA suit. You may recognize this case from last year’s article when the Appellate Court of Illinois also found that the insureds were entitled to a defense. This year, the Supreme Court of Illinois affirmed that decision.

In this dispute, an insured tanning salon sought defense coverage for a class action suit alleging violation of the Biometric Information Privacy Act (the “Act”). Salon customers alleged the salon violated the Act’s provisions when it scanned customers’ fingerprints and disclosed biometric identifiers and information to a third-party vendor. The insurer argued it did not owe any defense because the policy defined “personal injury” as an injury “other than a bodily injury” that arises out of an “oral or written publication of material that violates a person's right of privacy,” and “advertising injury” the same as “personal injury,” but without the “other than a bodily injury” language. The policy did not define the terms “publication” or “right of privacy.” The insurer argued that “publication” must be made to the public at large to qualify for coverage, rather than merely to a single third-party. The court disagreed, determining that “publication” and “right of privacy” were ambiguous, and as such, construed the terms in favor of coverage.

However, the court in Massachusetts Bay Insurance Company v. Impact Fulfillment Services reached a different result. In this case, an employer collected employee fingerprints for time-keeping procedures without the employees’ knowledge or consent. The court determined that there was no coverage for alleged violations of the Act because of an exclusion which broadly applied to any alleged violations of the Telephone Consumer Protection Act, the CAN-SPAM Act of 2003, the Fair Credit Reporting Act, or any other statutes which limit the collection or distribution of information or material. In reaching this conclusion, the court determined that the ACT was of the same kind and character as the other statutes specifically enumerated by the exclusion and thus extended application of the “catch-all” provision to apply.

As states continue to adopt biometric privacy acts, creating a statutory liability scheme, coverage for alleged violations will become crucial for policyholders.

To learn more about this case, click here.

6. HT Servs., LLC v. W. Heritage Ins. Co.
859 F. App'x 260 (10th Cir. 2021)
United States Court of Appeals, 10th Circuit
June 1, 2021

Does exclusion j(6) in a commercial general liability policy bar coverage for consequential damages flowing from faulty workmanship?

Possibly. In this dispute, the plaintiff, HT Services, a land developer, sought coverage for alleged property damage from the defendant, Heritage Insurance Company (“Heritage”), who issued a commercial general liability policy that covered land on which HT Services designed and constructed a residential community. In the underlying suit, the community’s homeowners association sued HT Services for negligent design and construction of a retaining wall and resulting damage stemming from the retaining wall. HT Services sought defense and indemnity coverage from Heritage. Heritage denied coverage and refused to defend the developer in the underlying lawsuit. This suit followed.

The 10th Circuit Court of Appeals found that Heritage did not owe a duty to defend HT Services against the homeowners association’s suit. The court applied Colorado law to the phrase “arising out of,” finding that a retaining wall “arose out of” the construction of excluded “residential structures.” More importantly, this opinion included a questionable interpretation of exclusion j(6), which excludes “faulty workmanship,” in contradiction of both the plain meaning of the exclusion as well as existing 10th Circuit case law. The 10th Circuit expanded application of exclusion j(6) in this case, citing with approval Advantage Homebuilding, LLC v. Md. Cas. Co., 470 F.3d 1003, 1011 (10th Cir. 2006), which holds that j(6) “was intended to exclude ‘property damage’ that directly or consequentially occurs from the faulty workmanship of the insured and its contractors/subcontractors … while the work is ongoing.” While this problematic opinion appears to interpret exclusion j(6) incorrectly, it will inevitably be cited by insurers to deny coverage for valid construction defect claims.

To learn more about this case, click here.

7. Century Sur. Co. v. Metro. Transit Auth.
No. 20-1474-CV, 2021 WL 4538633 (2d Cir. Oct. 5, 2021)
United States Court of Appeals, Second Circuit
October 5, 2021

Can an indemnity agreement in a trade contract supersede an "other insurance" clause of a liability policy? 

Yes. This dispute between two insurers arose following an underlying tort action settlement. In the underlying action, a subcontractor’s employee was injured and sued the general contractor and project owner. In the subject trade contract, the general contractor agreed to indemnify the project owner for liabilities arising out of the project. Insurers for the owner, general contractor, and subcontractor all contributed to settle the underlying action. However, the general contractor’s excess insurer asserted that it was excess to all other insurers and that its “other insurance” provision made it a “true” excess policy. The excess insurer thus disclaimed all coverage and did not contribute to the settlement. After the settlement, two separate declaratory judgment actions were filed to determine whether the excess insurer owed coverage and the priority of coverage among the various insurers. Interpreting New York law, the Second Circuit held that the indemnity agreement in the underlying trade contract governed such that the general contractor’s excess insurer was required to contribute to the underlying settlement and exhaust coverage before the owner’s primary coverage would be implicated.

This is a case of particular importance for policyholders. According to the Second Circuit, policyholders may contractually determine priority of coverage in their trade agreements, notwithstanding language to the contrary in their insurance policies.

To learn more about this case, click here.

8. Liberty Mut. Ins. Co. v. Penn Nat’l Mut. Ins. Co.
No. 20-3468, 2021 WL 5401543 (3d Cir. Nov. 18, 2021)
United States Court of Appeals, Third Circuit
November 18, 2021

Does the duty to indemnify "follow" the duty to defend where a settlement in the underlying action precludes any fact-finding regarding liability and allocation among parties? 

Yes. After a construction site fatality, an action for damages was brought against various parties, including a subcontractor who employed the decedent (insured by Liberty Mutual) and a concrete supplier (insured by Penn National). Liberty Mutual defended the employer, and Penn National defended the supplier (but did not defend the employer as an alleged additional insured). Following the settlement of the underlying action, Liberty Mutual filed suit against Penn National, arguing that the employer was an additional insured under the Penn National policy and sought reimbursement for the amounts it paid in defense and indemnity. The Third Circuit Court of Appeals held that, for purposes of duty to defend, looking at the complaint’s allegations, the employer qualified as an additional insured under the Penn National policy. However, the record was insufficient to determine whether Penn National owed the employer indemnity because the action had settled. The court held that, in the coverage action, the insurers may only seek resolution of factual issues that would not have been resolved in the underlying suit and that because the resolution of Penn National’s indemnity obligation required factual findings that would have been resolved had the underlying case not settled, Pennsylvania law required that Penn National's duty to indemnify “follow” its duty to defend.

To learn more about this case, click here.

9. J.P. Morgan Sec. Inc. v. Vigilant Ins. Co.
No. 61, 2021 WL 5492781 (N.Y. Ct. App. Nov. 23, 2021)
Court of Appeals of New York
November 23, 2021

Are disgorgement payments imposed by the SEC covered under a D&O policy?

Yes. In this case, the New York of Appeals took a pragmatic, policyholder-friendly approach in a coverage dispute over a $140 million payment to the SEC for “disgorgement.” New York’s highest court tackled the issue of whether SEC-ordered disgorgement payments constituted “penalties imposed by law” such that they would not constitute an insurable “loss” as defined by a policy covering “wrongful acts” of the insureds. The Court concluded – over a vigorous dissent and despite U.S. Supreme Court precedent to the contrary – that the term “penalty” does not clearly and unambiguously apply to SEC disgorgement payments for third-party gains. Accordingly, the insurers could not rely on the policy’s carveout from the definition of covered “loss” for “penalties imposed by law” to deny coverage.

To learn more about this case, click here.

10. Nat'l Indem. Co. v. State
499 P.3d 516 (Mont. 2021)
Supreme Court of Montana
November 23, 2021

Does a standard pollution exclusion bar coverage for pollution discharges by third parties for which liability is imposed upon an insured? And does the definition of occurrence imply a requirement for pro rata allocation of coverage? 

No. A pollution exclusion should be construed narrowly to apply only to pollution discharged by the insured; and no, the definition of “occurrence” may not be used to imply a pro rata requirement in the absence of an explicit pro rata clause in the policy.

This case results from a dispute over coverage for personal injury claims following exposure to asbestos dust against the State of Montana for its regulation of a privately owned mine. Mine workers sought damages from the State for allegedly withholding results of a workplace inspection and did not advise workers of the hazardous conditions in the mine. The State’s insurer sought to disclaim coverage based on a pollution exclusion. The State argued that the exclusion only applied if the State was responsible for the excluded discharge of pollutants and not merely held liable for the pollutants discharged by a third party. The Supreme Court of Montana noted that the pollution exclusion included an exception for sudden or accidental discharges and reasoned that the distinction between excluded knowing and intentional discharges, versus covered sudden and accidental discharges, would create an absurd result if the exclusion applied to discharges by third parties. Accordingly, the Court construed the pollution exclusion as applying only to discharges caused by the insured.

The Court also examined the insurer’s argument that liability must be proportionally distributed among its two years of coverage, and the State’s years of self-insurance. Absent a pro rata provision in the policy, the insurer relied solely on its argument that the definition of “occurrence” (an event “which results in bodily injury . . . during the policy period”) implies a pro rata requirement. The State argued that this interpretation would “erroneously give[] double effect to ‘during the coverage period’ as limiting both the trigger and the scope and extent of coverage.” The Court agreed with the State and noted that the insurer’s argument ignored the “all sums” language of the coverage provision: “The Company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay . . . caused by an occurrence .” Furthermore, prior authority held that a “self-insured retention does not constitute ‘other insurance’ for the purposes of allocating responsibility under ‘other insurance’ clauses.”

To learn more about this case, click here.

Cases to Watch in 2022

Federal Insurance Company et al. v. Healthcare Information and Management Systems Society, Inc. 
Case number 1:20-cv-06797, pending in the Northern District of Illinois

On October 19, 2021, a federal court allowed claims to proceed against Chubb, doing business as Federal Insurance Company, signaling that there may be coverage for COVID-19 claims under D&O policies. The policyholder, who was forced to cancel its 50,000-person annual conference due to the pandemic, was denied coverage for two underlying lawsuits arising out of that cancellation. Chubb cited the contract and professional services exclusions of its policy, but the court found that Chubb failed to establish “with absolute clarity” that either exclusion applied in order to avoid its duty to defend.

This case is ongoing with developments expected this coming year. It serves as an important reminder for policyholders to review all lines of coverage when facing a loss related to the COVID-19 pandemic. While it is not uncommon for business interruption and property policies to contain virus exclusions, other lines of coverage, such as D&O, may not.

Siplast, Inc. v. Emps. Mut. Cas. Co.,
489 F. Supp. 3d 603 (N.D. Tex. 2020)

The Fifth Circuit will soon decide the scope of the “your work” exclusion in a general liability policy. In this case, Siplast, a manufacturer of roofing and waterproofing systems, provided a roof system for a school that began to leak approximately four years after installation. Siplast contended that the leak was due to defects with the installation, not its product. Siplast was sued for its failure to honor its 20-year guarantee and tendered the claim to Employers Mutual Casualty Company (“EMCC”) who denied coverage, arguing both that the underlying suit alleged a breach of Siplast’s guarantee, rather than property damage, and that if the suit did allege property damage, the damage was excluded by the “your work” exclusion. On cross motions for summary judgment, the Northern District of Texas concluded that despite the underlying complaint being styled as a breach of Siplast’s guarantee, property damage was, in fact, alleged. However, the court also concluded that although the underlying complaint mentioned minor water damage to the ceiling due to the roof’s failure, the complaint only sought repair or replacement of the roof, not any associated property damage to the rest of the building. Because the plaintiff mentioned but did not seek damages for property damages beyond Siplast’s own work, the court found the “your work” exclusion applied and granted EMCC’s motion for summary judgment. On appeal, the Fifth Circuit will need to decide whether the “your work” exclusion is implicated merely by allegations of property damage separate from a policyholder’s own work or whether a complaint must seek compensation for property damage separate from a policyholder’s own work to exclude a claim from coverage.

For more information or questions, contact Jeffrey J. Vita at JVita@sdvlaw.com, Grace V. Hebbel at GHebbel@sdvlaw.com or Michael D. Angotti at MAngotti@sdvlaw.com.