This month, when many are working with inspiration towards their New Year’s resolutions, we urge each business policyholder to set a goal fitting of our modern high-tech age: checking its cyber insurance.

Cyber insurance is something of a fluid catch-all term, but insureds generally seek it to provide coverage for computer-based perils, such as those arising from unauthorized computer access (“hacking”), malicious software (“malware”), email fraud (“phishing” or “spoofing”), network failure or inaccessibility (“ransomware”), and the resulting breach or disclosure of protected data. Such insurance can be either first-party (covering the insured’s own losses arising from, say, a computer system malfunction, a disgruntled employee, or a cyber criminal) or third-party (covering the insured’s liability to, say, its consumers for a data breach or the government for regulatory fines).

Standalone cyber insurance policies are still in their infancy, with varying policy language and pricing, setting them in rather stark contrast to the standardized forms and pricing models characteristic of some other types of insurance. Perhaps because this market is still maturing, reports indicate that only half of U.S. businesses have standalone cyber insurance policies,[1] with the percentage almost certainly lower among small- and medium-sized businesses that may be least able to survive the large expenditures associated with a cyber event.

Last year, a consortium of major risk and tech companies – Aon, Apple, Cisco, and Allianz – teamed to offer discounted cyber insurance, seeking to provide a holistic approach to cyber risk management that benefits from each partner’s expertise.[2] Under this bundled arrangement, a prospective insured undergoes a cybersecurity assessment by Aon, uses secured tech products and services from Apple and Cisco, and obtains a cyber insurance policy issued by Allianz. The goal is to encourage more business to sign-up for cyber coverage, including by providing incentives such as discounts for security enhancements and access to tech consulting and incident response services.

As of this writing, it appears this first-in-industry offering has not been tested in the courtroom. But perhaps even more surprising is the absolute dearth of cyber-specific case law. In one of the few reported cases, a federal district court denied coverage under a cyber policy for credit card industry fees imposed due to a consumer data breach, parsing the policy’s language with the type of analysis commonly applied to other more traditional insurance.[3]

This leads to an important point: Given the novelty of cyber insurance, insurers and courts will interpret them according to the familiar legal cannons, and insureds should consider whether coverage might exist under their existing traditional insurance policies. This blog has previously advised you about an insured who unsuccessfully sought coverage under a crime-protection policy for an email spoofing fraud.[4] But thankfully, other insureds have been successful. For instance, both the Second and Sixth Circuits have found coverage for a spoofing fraud under a crime or business policy’s computer fraud provision.[5]

Considering all of this, we encourage all businesses to check again their cyber security risks and coverage needs, under both cyber-specific and more generalized insurance policies. Lathrop Gage’s insurance recovery team is experienced in these matters and stands ready to assist policyholders at each step of the process, from conducting proactive policy analysis to litigating high-value coverage disputes at trial and on appeal.

[1] “Why 27% of U.S. Firms Have No Plans to Buy Cyber Insurance,” Insurance Journal, (last accessed January 2, 2019).

[2] “Cisco, Apple, Aon, Allianz introduce a first in cyber risk management,” Apple press release, (last accessed January 2, 2019).

[3] P.F. Chang’s China Bistro, Inc. v. Fed. Ins. Co., No. CV-15-01322-PHX-SMM, 2016 WL 3055111 (D. Ariz. May 31, 2016), (last accessed January 2, 2019).

[4] “Social Engineering Cyber Coverage: Protecting Your Company from the Human Factor,”

[5] Medidata Sols. Inc. v. Fed. Ins. Co., 729 F. App’x 117 (2d Cir. 2018), (last accessed January 2, 2019); Am. Tooling Ctr., Inc. v. Travelers Cas. & Sur. Co. of Am., 895 F.3d 455 (6th Cir. 2018), (last accessed January 2, 2019).

Lathrop Gage Partners Bill Beck and Mike Abrams were recently profiled by Super Lawyers for their success in securing compensation for individuals who have been wrongfully convicted, individuals who have often spent decades in prison for crimes they did not commit. Lathrop Gage’s Civil Rights Insurance Recovery Practice group leads the nation in securing insurance proceeds for wrongfully convicted persons, recovering over $150 million for wrongfully convicted individuals and their families since 2004. Additionally, the firm has partnered with the Midwest Innocence Project to help exonerate individuals who are currently in prison for crimes they did not commit and helped to facilitate the recent release of Laquanda “Faye” Jacobs, who spent 26 years in prison after being wrongfully convicted of capital murder at the age of 16.

Interviewed by David Scheidemantle and Alana McMullin of Lathrop Gage’s Insurance Recovery & Counseling Group.

In a recent decision, the United States Court of Appeals for the Sixth Circuit considered whether a “criminal acts” exclusion in a first-party commercial insurance policy barred coverage for damage to leased property caused by the insured’s tenant in the operation of a marijuana cultivation business.  K.V.G. Properties, Inc. v. Westfield Insurance Co., 2018 U.S. App. LEXIS 232296, 2018 FED App. 0178P, 2018 WL 3978211 (6th Cir. Aug. 21, 2018).  Marijuana remains illegal as a Schedule 1 drug under federal law but is protected in certain circumstances under the law of Michigan, where the insured property was located.  Fatal to the insured’s case, it had pleaded in an eviction proceeding that the tenant’s activities were illegal, which the Sixth Circuit took as an admission that the tenant’s conduct was illegal under Michigan as well as federal law, landing the claim within the confines of the criminal acts exclusion.  While paying lip service to black letter law that the insurer bears the burden of establishing the applicability of an exclusion, the court nevertheless ruled against the insured because it had provided no evidence that the tenant had complied with Michigan’s marijuana laws.  The court left open whether the exclusion still would have applied had the insured made such a showing (and hinted the outcome might have been different had the insured done so).

Taking into account the results of November’s elections, 31 U.S. states have legalized marijuana for medicinal use, and ten have legalized recreational use.  As long as federal law remains out of step with the national trend, the circumstances of the K.V.G. Properties case are bound to repeat themselves, and insurers may attempt to deny coverage under the standard criminal acts exclusion for claims arising out the operation of marijuana businesses even if those businesses are lawful in the states and localities in which they are located.  We’ll see how the courts react.  In the meantime, to insure their potential losses, those who invest in or operate marijuana businesses – and those, like K.V.G. Properties, who lease or provide goods or services to them – need to look beyond their standard commercial policies and consider procuring cannabis-specific insurance policies.

For an insurance broker’s perspective, today we sit down with Bill Lewis, Executive Vice President of Bolton & Co., a true pioneer in the field of cannabis insurance.  Over the last two years, Bolton has amassed 75 clients for which the company has brokered cannabis insurance policies, for a total of $4 million in premiums.

Alana: Bill, thank you for joining us this afternoon.  Our clients operating in the cannabis space are certainly fortunate to have the opportunity to obtain insurance specific to their business as a result of your work at Bolton, so let’s jump right in.  How do the policies you are marketing deal with pitfalls highlighted in K.V.G.?

Bill: Well, the biggest difference between that case and the policies Bolton is marketing is that KVG had a standard commercial landlord contract. Those policies have standard exclusions, language, and endorsements that can make it difficult for marijuana businesses have coverage for their claims because they are not specifically tailored to the needs of the cannabis company.  In contrast, the cannabis insurance policies we’re now seeing don’t have blanket “criminal acts” exclusions because both insurers and insureds are aware that marijuana is still federally illegal, even if the state has legalized it. So, if a company is complying with state and local cannabis regulations and laws, coverage under a cannabis insurance policy shouldn’t be denied simply because the claim relates to cannabis.  To me that’s the best way to deal with the concerns of that case.

Alana: The KVG court left an unresolved issue, that is, the court declined to answer the “difficult” question of if cultivating marijuana in a state that has legalized it is still “criminal conduct” under that standard insurance language.  The opinion appears to be intentionally narrow, stating that only when marijuana cultivation violates both state and federal law, and the insurer has a Dishonest or Criminal Acts Exclusion, coverage is barred. Are insurance companies taking that into account?

Bill: Yes, they are.  On the one hand, I’ve seen companies that issue standard insurance policies adopt endorsements or exclusions specific to the cannabis trade. For example, Admiral Insurance Group, LLC, issued a cannabis extraction and processing business a “Health Hazard Exclusion” specific to marijuana and THC because the business already had a commercial general liability policy with the insurer.  Insurers like Admiral are aware that insureds are participating in the cannabis industry and want to prevent paying for specific types of injury or damage that only such businesses may have. On the other hand, cannabis-specific insurance policies are completely transparent to the fact that they are covering marijuana related businesses. Policies may even define the types of marijuana covered, as some products and THC levels may be treated differently by different policies. This transparency avoids the difficult question you mentioned because the policies are specifically tailored to insureds who are manufacturing, distributing, and selling marijuana in a state that has legalized it.

David: Bill, what types of clients are you working with in this space?

Bill: They really run the gamut:  investors, venture capital and private equity firms, cultivators, extractors, processors, harvestors, pharma compounders, equipment manufacturers, wholesalers and distributors, branding companies, transporters, dispensaries, franchisors, labs that test the products, property managers, landlords, tobacco stores, garden stores, undoubtedly others I’m just not thinking of just now.  So, basically, if you’re a company that in any way touches the cannabis industry, you may be subject to local and state marijuana laws and there is likely an insurance policy out there specific to your coverage needs.

David: You’ve included landlords, like K.V.G. Properties.  A notable fact in the case was that K.V.G. was not even aware of the activities of its tenant – didn’t know it was operating a marijuana business.  How can you protect the landlord in that circumstance?

Bill: David, too often, insurance is the tail that wags the dog, or, in the K.V.G. case, at least initially, maybe just a forgotten flea on the tail.  The loss in the case was $500,000 because the tenant had essentially gutted the property:  removed walls, cut holes in the roof, altered ductwork, and altered and severely damaged the HVAC.  With a loss of that magnitude, insurance should have been a first priority alongside eviction.  While I’m sure I’m preaching to the choir on this one, with a good insurance coverage advisor at the outset, the landlord could have avoided a head-on collision with the criminal acts exclusion, and the Sixth Circuit’s decision might have been different.  But even more prophylactically, I would advise landlords who have property for rent in areas the state allows for cannabis operations consult with their legal counsel in structuring their lease agreements to protect them financially from a tenant operating illegally. There is no insurance endorsement for a standard policy available to address this situation. The intent of the carriers is to not cover criminal acts. The landlords my also ask for a copy of the cannabis license from the tenant that was issued allowing them to operate legally.

David:  What insurers are you working with who offer cannabis-insurance, and what distinguishes them from insurers who fear to tread into the territory?

Bill: We are working primarily with three insurance carriers – Next Wave Insurance, James River Insurance, and Evanston Insurance – offering a broad range of coverage types, including workers compensation, commercial property coverage, products liability coverage, product recall and withdrawal coverage, commercial crop coverage, general liability coverage, and excess liability coverage.   These carriers see an opportunity and need and are stepping up to the plate.  Underwriters at Lloyd’s of London began offering cannabis insurance in Canada as soon as it became federally legal there, and I’m sure we’ll see more carriers coming into the space as progress is made at the federal level in the U.S.  You may have seen the Los Angeles Times piece a week or so ago commenting on the positive impact on marijuana investment that has been going on since the departure of Jeff Sessions [], and I would not be surprised if we experienced a similar relaxation in the insurance market. We are starting to see more carriers enter the space along with those I mentioned above. We are working with Goldenbear (an admitted carrier in California), Kinsale, Hallmark, Berkshire, Protective, Admiral, Atlas, Canopius, NICO, and Progressive, and we have a couple of exclusive programs writing for our agency. We are also seeing captives formed in specific states.

Alana: What hurdles are your clients encountering in procuring the types and extent of coverage that you recommend and that are essential to their businesses?

Bill: The single biggest hurdle for these businesses would be the applications they must fill out before being eligible for coverage. These applications can be burdensome, inquiring deeply into compliance issues. To help these companies prepare to apply, we’ve compiled some of the questions found on Next Wave Insurance, James River Insurance, and Evanston Insurance marijuana policy applications, such as:

  • Whether a quality assurance or product recall plan is in place?
  • Whether the cannabis products are tested prior to distribution? How?
  • Whether the applicant is using software to track sales and transaction data?
  • Whether all Consumer Product Safety Commission regulations will be followed?
  • Whether there is a complaint handling procedure in place?
  • Whether pesticides are being used? If so, are there safeguards for pesticide issues?
  • Whether the applicant offers delivery of marijuana products?
  • Whether any part of their product originates from outside the United States?
  • Whether an applicant consulted an attorney to determine labeling requirements?

The information provided in the applications forms one of the bases for establishing the premiums to be charged.  And of course inaccuracies in the applications can put coverage at risk in the event of a claim.

These policies are not ones that should be purchased and placed in a drawer.  They have detailed on-going warranty requirements the insured must comply with or run the risk of a claim denial.  For example, the insured must obtain MVRs – motor vehicle records – and background checks on employees, and there are very detailed warranties for the transportation of the insured’s money and cargo.

Another important thing is that a different policy is required for each state in which the insured is doing business, as the terms and warranties differ depending on applicable state law.

Alana: So, because it’s vital that the applications are filled out accurately and fully, how are you working with your clients to avoid pitfalls?

Bill: I would first recommend businesses look over the insurance applications thoroughly before deciding to apply to a specific insurer. The questions in these applications force businesses to think about their experience or lack thereof in the industry what their company may look like in the coming years.  The questions really make you think, what am I doing to make sure that the quality of my product won’t be tampered with or depleted, how experienced are my employees when it comes to handling cannabis, what types of products can we sell in what states, and whether there is a structure in place to make sure only those who are legally allowed to buy or use your product are the ones who actually are.

Second, I recommend consulting with attorneys such as yourselves who can assist in providing guidance on full compliance will all state laws, regulations, administrative codes, and any other governmental orders governing cannabis and their business.

David: Along those lines, Bill, along with my partner Halina Dziewit in the Lathrop Gage Boulder office [] we are now offering a Corporate Hygiene in the Cannabis Fields program to assist cannabis businesses in moving in the right direction.  The program focuses on adherence to corporate formalities, regulatory compliance, insurance coverage, and employment practices. Since each state that has legalized marijuana treats different plant strains, THC levels, and products differently, complying with state and more specifically, county and city regulations, is extremely important, especially since being out of compliance with any regulatory body could put your coverage at risk. We’d welcome the opportunity to put on the program for your clients and prospective clients.

Bill: That sounds like a great opportunity for your firm, Bolton, and our respective clients!

Alana: Bill, thank you very much for joining us today.  It is good to know where we and our clients can turn for an evaluation of the current and ever-evolving state of the cannabis insurance market, for premium management, and for brokering an appropriately protective insurance program.  We’ve covered a lot today, but there is more to discuss, so perhaps we can meet with you again in 2019 for your additional insights at that time.

Bill: My pleasure, and thanks to the two of you.


The CDC estimates that 1 in 6 Americans get sick from contaminated foods or beverage each year, and that 3,000 people die, resulting in total food-borne illness costs of more than $15.6 billion dollars each year. Those numbers are not surprising when food recalls seem to be an almost weekly occurrence, with salmonella-tainted foods prominently featured in multiple large-scale outbreaks in 2018. Although food contamination seems to be on the rise, experts suggest that frequency is up – not due to an actual increase in outbreaks – but, instead because we are better equipped to identify and track outbreaks. Thanks to genome sequencing, we can look at food’s DNA fingerprint to better identify its source. Even so, it is still difficult to identify precisely where in the food supply chain the contamination began. As a result, every entity in the supply chain can be, and often is, affected when contamination is discovered.

This reality can present numerous insurance coverage challenges, and all companies ranging from ingredient suppliers to processors and retailers should consider what coverage best fits their needs based on their most likely exposure given their position in the food supply chain. In reviewing coverage options, it is important to realize that not all product recall and/or contamination coverage is the same (and some policies may be triggered only by contamination, while others are triggered only by a mandatory recall).

Further, it bears noting that general liability coverage is still a relevant potential source of coverage. Bodily injury claims are the classic case for invoking a general liability policy, but even certain third-party property damage in a contamination/recall situation may also enjoy coverage under a traditional general liability policy. See, e.g., Neth. Ins. Co. v. Main St. Ingredients, Ltd. Liab. Co., 745 F.3d 909, 911 (8th Cir. 2014) (insurer had duty to defend and indemnify insured that inadvertently sold salmonella-contaminated dried milk to Malt-O-Meal, which then incorporated the milk into its instant oatmeal products).

For more information about recovering insurance in the event of a recall, continue reading here.

Hurricane Florence has caused devastation throughout the Carolinas, including as-yet-unknown property damage, business interruption, environmental contamination, and most tragically, loss of life.

When a disaster like Florence occurs, corporate policyholders enter crisis mode, doing everything they can to make sure business losses are mitigated to the extent possible, providing workarounds for customers, and generally making every effort to salvage what they can and assess the losses incurred.  What might not be on any policyholder’s radar screen, however, are the steps that can be taken now to maximize insurance coverage and recovery once the immediate crisis is over.

Decisions made and actions taken at the outset of an insurance claim when the crisis is still unfolding and resources are stretched to their maximum can understandably lack the level of strategic thinking that the policyholder would apply in the absence of disaster.  As a result, those actions and decisions are too often are used against the policyholder down the road when things have returned to relative normalcy.

Right now, there are five things that every policyholder that has sustained property damage or business interruption due to Hurricane Florence can do with virtually no effort to make sure that there are no missteps in the insurance process:

1. Give notice!

As mundane as it may sound, giving notice of loss to your insurer as soon as practicable is important.  If you don’t give notice, you are at risk of losing coverage for some or all of your claim.  And don’t worry about the time and effort it will take; it’s not hard to do.  Just call your broker and ask them to notify your carrier.  Don’t worry about all the details at this point, just get the insurance carrier engaged and the process underway.  There will be time to worry about the details later.

2. Cooperate, but don’t elaborate.

It is human nature to want to “help,” particularly when a disaster strikes.  It is also human nature to assume that “you are in good hands” with your insurer because that is, of course, what we are conditioned to believe.  But do not fall into the trap of offering answers to questions that haven’t been asked, or giving an opinion on how the loss occurred or what losses have been sustained at this nascent stage.  Policyholders have an obligation to cooperate in the process, but that cooperation need only be reasonable.  Don’t be afraid to tell the insurer or adjuster that you need some time to respond.  Answering questions without thinking them through and providing unsolicited opinions are not going to make the claim process move any faster.

3. Pick up the phone, and limit internal emails about the insurance claim.

It is easy to be cautious when talking to an insurer representative.  It is not always so easy to do the same in internal communications.  To the extent possible, don’t put your thoughts, opinions or “analysis” of losses, causes of loss, or coverage in writing.  Things are moving rapidly in the first days after a disaster and often what we think we know now can change.  Of course, provide management with updates, but don’t offer up written opinion or analysis. You don’t want your email to be the one everyone points to as the reason that losses are not covered.  Assume that all emails will be in the insurer’s hands at some point, so keep the written communications factual, and pick up the phone as much as possible.

4. Get your documentary ducks in a row.

Given the chaos that ensues upon an event like Florence, it is important to task someone with responsibility for being the company’s voice to the insurer, and to at least beginning the process of assembling the material you will need to document the claim.  That means more than just collecting the various insurance policies and insurer correspondence.  It means assembling your customer lists, contracts, shipment and inventory information, and other documentation that you will need not only to show the value of the property lost or damages, but also to prove up the business interruption losses – i.e., loss of income resulting from the property damage.  As bad as the property damage might be, the down time and loss of customers may ultimately be as bad if not worse, so start pulling together the information you need to document it now.

5. Don’t be afraid to engage coverage counsel.

As management sees the floodwaters rising, the natural temptation is issue a decree that no “non-essential” costs should be incurred.  Be warned:  The larger the disaster is, the more likely disputes will arise, because the insurer’s exposure is probably far greater than yours.  Nothing in this world is certain, but it is a safe bet that if your carrier has insured your business, they have insured many others in the disaster zone.  That means any position an insurer takes on your claim may have repercussions, and as an institutional litigant, you can be sure that the insurers have already engaged counsel to protect their interests and limit their liability.  So, even though the company is not in litigation, even if it has a professional risk manager and/or the company’s broker is pitching its in-house “claims advocate” at no extra charge, you still need to carefully consider engaging coverage counsel now – not to file a lawsuit or start a fight when none has yet arisen, but rather, to provide advice to management, to assist in navigating the process and to think through all the coverage issues and how to best handle them, so that there is no dispute down the road.

Remember those spam emails from Nigerian royal family members needing to transfer millions of dollars out of Nigeria, requesting the recipients provide banking and personal information to “hold” the funds or otherwise front money to the fraudster to pay taxes and fees?  While most people have (hopefully) wised up to that scheme, a more insidious and devastating fraud has taken hold in the corporate world – the “social engineering” scheme.

“Social engineering” schemes are shades of the Nigerian letter scams, except the fraudster pretends to be someone affiliated with your company, such as a contractor or vendor.  The emails are convincing even to sophisticated employees, often instructing the recipient to follow “corporate procedures” to complete the money transfer.

Typically, this is how the scheme works:

(i)         Your employee receives a phishing email from a spoofed address where the fraudster pretends to be affiliated with your company and requests a transfer of an (often substantial) amount of money;

(ii)        Your spoofed employee follows in-house protocols with respect to the requested transfer, sometimes even getting approval from more senior level management;

(iii)       Your employee makes the transfer to the fraudster’s account; and

(iv)       Your company discovers the fraud only after the transfer.

Many companies are shocked to find only after the fact that their insurance carriers do not cover these losses.  Unfortunately, not having appropriate cyber coverage can be a devastating mistake.  The National Cyber Security Alliance found that as much as 60 percent of hacked small and medium-sized businesses go out of business within six months after being hit with a cyber-attack.

Businesses can greatly reduce the threat by mitigating cyber risks through managerial and technical processes, including implementing security measures such as firewalls, duo layer computer access, limiting employee access to sensitive data information, analysis of third party vendor’s security procedures, and regular and thorough training of employees.  However, even the best measurers cannot fully neutralize cyber threats.  Businesses remain vulnerable because of the “human factor” associated with these schemes; a skilled fraudster executes a social engineering scheme with the (unwitting) help of an innocent employee.

Recent court decisions highlight the importance of closely reviewing cyber policies to ensure that “social engineering” scams are fully covered.  In Apache Corporation v. Great American Insurance Company, 662 F. App’x 252 (5th Cir. 2016)[1], for example, the court held that the policyholder was not covered for social engineering attack despite having “computer fraud” coverage providing coverage for “loss of … money … resulting directly from the use of any computer to fraudulently cause a transfer of that property….”   The Apache employee received a spoofed email with a signed letter on the vendor’s letterhead, instructing the employee to change the vendor’s account information and submit future payments to the new (fraudulent) account.  The employee even called the telephone number provided on the (forged) letterhead and verified the request, while still another employee approved the transaction.  Apache thereafter submitted payments to the new account.  The Fifth Circuit held that the $2.4 million loss was not covered because the computer use was not the direct result of the loss, but “merely incidental” to the fraud.

This case highlights how critical it is to companies to transfer the risk of all cyber-attacks through comprehensive cyber coverage, particularly to cover risks that cannot be fully mitigated by security measures because of the “human factor.”  For this reason, it is important to review policy terms to assess the scope of coverage with your broker before your company is attacked.


Excess insurance plays a vital role in mitigating the risk of large losses, but excess insurers often contend they have no obligations and are entitled to sit on the sidelines of a lawsuit against their policyholder until underlying insurers have fully paid their limits.  This position harms policyholders, particularly when settlement of a lawsuit requires contribution from these excess insurers.

While courts universally acknowledge the value of pre-trial resolution and settlement, some jurisdictions have discouraged settlement of large losses by holding that excess insurers have no duty to the policyholder until primary policies have completely exhausted their limits.  When excess insurers refuse to come to the settlement table, settlements often fall through, exposing policyholders to high risk verdicts.

Fortunately, some courts do acknowledge that excess insurers have pre-exhaustion obligations.  The recent decision by the Ninth Circuit in Teleflex Med. Inc. v. Nat’l Union Fire Ins. Co., 851 F.3d 976 (9th Cir. 2017) is the leading case in holding that excess insurers must participate in settlement negotiations, even prior to exhaustion of underlying layers.

In Teleflex, the policyholder agreed to mediate an IP infringement lawsuit early in discovery, but excess insurer National Union refused to attend.  The parties reached a proposed settlement, contingent on contributions from National Union.  However, National Union refused to consent to the settlement despite the fact that policyholder risked exposure from a verdict well in excess of the underlying carrier’s $1m limit.  The policyholder finalized the settlement anyway and proceeded to sue National Union for breach of contract and bad faith for the amount of its settlement contribution, and was successfully awarded over $6m by the United States District Court for the Southern District of California.

On appeal to the Ninth Circuit, the critical issue raised by National Union was the continued applicability of the so-called “Diamond Heights rule,” taken from a 1991 California Court of Appeals case.  The Diamond Heights rule says that where an excess insurer is presented with a proposed settlement of a covered claim approved by policyholder and primary carrier, the excess insurer has three options:

  1. approve the proposed settlement;
  2. reject the proposed settlement and take over the defense; or
  3. reject both proposed settlement and defense, but face a potential lawsuit by the policyholder seeking contribution toward the settlement.

After finding the Diamond Heights rule was still good law, the Ninth Circuit rejected National Union’s attempts to distinguish that case based on the fact that the Telexflex litigation was still in relatively early stages. The Ninth Circuit countered that there are good reasons to settle during discovery rather than on the eve of trial.  The Ninth Circuit proceeded to criticize National Union for months-long “foot-dragging” rather than expediently settling, and ultimately upheld the District Court’s award for breach of contract and bad faith.

Policyholders should take note.  While the Diamond Heights holding may be decades-old, it takes on new force in light of the Teleflex decision.  In particular, it clarifies that foot-dragging by an excess carrier, delaying the execution of a proposed settlement, is not appropriate at any stage of litigation.  Where a good-faith proposed settlement is on the clock, excess insurers must either approve, agree to defend, or face a potential lawsuit for contribution.

In late 2017, in a move favoring policyholders, the Missouri Court of Appeals for the Eastern District applied the “all-sums” approach to allocating and exhausting insurance coverage for a continuous asbestos harm in Nooter Corp. v. Allianz Underwriters Ins. Co., 536 S.W.3d 251 (Mo. App. 2017). Although Nooter has sparked significant chatter in the insurance world, Lathrop Gage is dedicated to educating its clients on what Nooter means to you.

In Nooter, plaintiff Nooter Corporation was in the business of designing, installing, and distributing pressure vessels for refiners and chemical plants. Some of Nooter’s sites had become contaminated with asbestos over the course of many years, and Nooter began receiving claims for asbestos-related bodily injuries in the late 1990s. Nooter sued eight of its excess insurers for coverage spanning from 1949 to 1985 to cover the defense costs and liabilities associated with defending these claims. One of the many battles taken up by the parties at the trial court was, assuming the policies were triggered, whether the court should allocate the losses among the insurance companies using the “all sums” approach or the “pro-rata” approach, the two leading methods of allocation in American courts. The trial court applied the “all sums” approach, and the excess insurers appealed. The Missouri Court of Appeals affirmed the trial court on this issue and the Missouri Supreme Court subsequently denied the insurers’ appeal.

So what is the “all sums” approach to allocation and exhaustion and why does it matter?

Many companies, just like Nooter, are facing claims or allegations of different types of “long-tail” liabilities, i.e. allegedly continuous or escalating damage over a range of time and implicating several policies and insurance companies. Examples of long-tail liabilities include asbestos claims (like in Nooter), mass products litigation, or toxic tort. Because the damage cannot be traced to a single incident or event, it can be difficult to identify which policies are implicated, and even more difficult, how the losses will be allocated among the insurers.

Many insurers, like the insurers in Nooter, advocate for a “pro-rata” approach to allocation of losses. Under this theory, losses are allocated proportionally across all triggered policies for each year of damage or exposure, and accordingly, policies are exhausted “horizontally” across each layer of coverage. However, the policyholder would be responsible for any losses that are apportioned to an uninsured or under-insured year of exposure.

In contrast, the “all-sums” approach essentially makes the insurers’ liability to the policyholder joint and several. The result is that the policyholder is entitled to select a triggered policy, exhaust the policy completely, and move onto the next, regardless of whether the losses actually occurred during that policy period. The insurers are then left to allocate the losses between themselves by seeking contributions from each other. This is consistent with the theory of “vertical exhaustion,” i.e. policies are exhausted up the stack of coverage.

Nooter is part of a growing trend of courts applying the “all sums” theory of allocation and exhaustion. The approach has received significant consideration since the New York Court of Appeals’s 2016 decision in Viking Pump[1], and the trend does not appear to be slowing down.[2] In addition, early last month a federal judge sitting in the Eastern District of Missouri held that Nooter required application of the “all sums” theory to long-tail liabilities in Missouri. Zurich American Insurance Co. v. Ins. Co. of N. America, No. 4:14 CV 1112 CDP, 2018 U.S. Dist. LEXIS 77061 (E.D. Mo. May, 8, 2018). While the court had previously predicted that the Missouri Supreme Court would apply the “pro rata” approach, it reversed its prior ruling because post-Nooter it was clear that “the Missouri Supreme court would apply an ‘all sums’ method to allocate the [] loss.” Id. at *14.

While application of the “all sums” doctrine is no guaranty, the Nooter decision shows Missouri’s willingness to apply the “all sums” doctrine in appropriate scenarios. The Lathrop Gage insurance recovery team is willing and able to assist you as you navigate the intricacies of your post-Nooter, insurance recovery needs.

[1] In the Matter of Viking Pump, Inc. and Warren Pumps, LLC Insurance Appeals, 52 N.E.3d 1144 (N.Y. 2016)

[2] See ALI’s Proposed Final Draft of the Restatement of Law, Liability Insurance, § 41 cmt. d, and recognizing a “split of authority regarding the allocation rule.”

In 2017, the Missouri Supreme Court handed down its Doe Run decision, where it interpreted, as a matter of first impression, an insurance policy’s so-called “absolute pollution exclusion,” holding that it barred coverage for environmental-degradation claims arising from the release of toxic industrial byproducts. We believe this policyholder-adverse decision is limited by its facts and reasoning, and thus policyholders can still invoke the earlier and more favorable Hocker Oil and Wyatt decisions when seeking insurance coverage in other contexts.

Continue Reading The Absolute Pollution Exclusion: The Missouri Supreme Court Weighs In

UPDATE on May 23, 2018: Yesterday, ALI voted to approve these rules and many more contained in a 488-page document containing guidelines intended to aid courts in resolving coverage complex disputes. It remains to be seen how and whether courts across the country actually follow these guidelines. Lathrop Gage will be following the effect of this project on the law over the next several years and will keep you updated.

The American Law Institute (ALI) is voting tomorrow on new guidelines that may affect the complex rules adopted and applied by courts in insurance coverage disputes.  Here are three of the hotly debated rules:

1)         Use of extrinsic evidence in coverage disputes.       Under ALI’s current approach referred to as the “Corbin rule” or “contextual approach,” courts may interpret policy terms in light of “all the circumstances surrounding the drafting, negotiation and performance of the insurance policy.”  The proposed rule advances a “plain meaning” rule to policy interpretation. Under that rule, courts must construe an insurance policy term on the basis of its plain meaning, if it has one.  Extrinsic evidence regarding an insurer’s negotiations and course of dealing with a policyholder “may be considered only if the court first makes the threshold determination that the insurance policy term is ambiguous when applied to the facts of the claim at issue,” the restatement says. This rule may ultimately be unfavorable to policyholders because courts today almost uniformly construe ambiguous terms against the insurers.

2)         Insurer’s right to recoup defense costs.       One issue that is often litigated is an insurer’s right to recoup defense costs if a claim is ultimately determined not to be covered.  The restatement establishes a “default rule” that defense costs cannot be recouped absent explicit policy language or recoupment has been “otherwise agreed to” by the policyholder.  This rule is decidedly favorable to policyholders.

3)         Policyholder’s right to settle without consent.        If an insurer is defending under a “reservation of rights,” may a policyholder settle the underlying case without the insurer’s consent?  The new rules say yes. A policyholder may unilaterally settle an action without violating its “duty to cooperate” or other policy restrictions if the insurer has a “reasonable opportunity” to participate in the settlement process and “reasonable effort” is made to obtain the insurer’s consent.  This rule is decidedly favorable to policyholders.

We will keep you updated as the vote progresses.

*Article released by the Policyholder team.