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.

The attorney-client privilege is one of the oldest and most widely-known—if generally misunderstood—common law doctrines. In its broadest outline, it’s a rule that’s fairly easy to grasp and apply: a communication between a lawyer and a client for a legal purpose that is held in confidence is protected from disclosure by privilege. The rule ensures that clients can be candid with their lawyers without fear that their candor is discoverable (and ultimately harmful to their case).  But don’t miss the important caveat: the communication must be held in confidence, meaning when there’s another, non-client party in on the conversation, there is no privilege.

This presents an obvious but often missed dilemma, as modern litigation often involves four critical parties sharing communications: the person or entity being sued, their attorney, their liability insurer(s), and their broker. This situation is so ubiquitous that it may be easy to forget that under the traditional rule, when you share information with your insurer or your broker, you’re breaking privilege.

Continue Reading We’re Not Afraid to Talk About Privilege

Thirty-two years ago, a major California newspaper urged Californians to vote “no” on a ballot initiative commonly referred to as “Prop 65,” which would require certain businesses to include warning labels on products that contained a compound known to the State of California to cause cancer, birth defects or reproductive harm. However, the editorial board dismissed what it viewed as “exaggerated” claims by other opponents of Prop 65, reassuring voters that even if the measure passed, it would “not lead to the banning of ordinary table salt or require warning labels on every apple sold or cup of coffee served in California.” But last month, a California Superior Court judge ruled that businesses may have to do just that – require warning labels on cups of coffee served in California.

The complaint in the case, Council for Education and Research on Toxics v. Starbucks Corporation, et al., alleges that dozens of companies in the coffee business violated Prop 65 in failing to warn consumers that brewed coffee contains acrylamide, a substance believed to be a carcinogen by the State of California. Defendants in the case were previously unsuccessful in persuading the court that Prop 65’s warning requirements were unnecessary because the alleged acrylamide exposure posed “no significant risk.”

Continue Reading Coffee and Cancer Warnings in California

Montrose v. Superior Court and the Future of Exhaustion Under California Law.

When a policyholder faces a “long-tail” claim (i.e., a claim involving injury that remains undetected for some time after the alleged wrongdoing, and the harm may have been sustained over a number of years—even decades), like property damage and bodily injury claims arising out of alleged environmental contamination or asbestos exposure, there are often multiple years and layers of primary and excess insurance policies that provide coverage. However, there are also many issues that may arise, making it difficult for insureds to collect all relevant coverage. For example, the insured may have trouble finding all applicable policies that were in place at relevant times, there may have been mergers and acquisitions that complicate matters, some coverage may have become insolvent, etc.

A key legal issue that impacts the manner in which policyholders may collect all relevant coverage is whether the insured must first exhaust all underlying primary coverage in place during the time of alleged harm before it is allowed to tap into valuable excess coverage (often called “horizontal” exhaustion), or whether it may choose to first collect the primary and excess coverage in any given year before seeking to collect other years of coverage (often called “vertical” or “all sums” exhaustion). While horizontal v. vertical exhaustion (or some variant thereof) is a state-by-state issue, the Supreme Court of California in Montrose Chemical Corp. v. Superior Court, 406 P.3d 327 (Cal. 2017) recently set the stage for potentially one of the most impactful coverage decisions on this issue in decades. There, the California Supreme Court recently granted the policyholder, Montrose’s, request to decide whether it must exhaust all its primary policies on the risk before recovering under any of its excess policies for environmental damages.

The Montrose coverage dispute began in 1990 and arose out of the policyholder, Montrose’s, long-running efforts to procure coverage for over $100 million in damages incurred in a CERCLA action. The action arose out of Montrose’s production of the pesticide DDT at its facility in Torrance, California, between 1947 and 1982 and implicates nearly two dozen insurers that issued both primary and excess policies to Montrose.

Continue Reading Must Policyholders Exhaust All Underlying Policies Before Pursuing Excess?

In a recent webinar, Lathrop Gage Partner Mike Abrams and Hays Companies Vice President and Cyber Liability Practice Leader Dave Wasson covered several common pitfalls to avoid in buying cyber liability risk policies. In summary, the cyber insurance market is not a mature one, and policies differ significantly. It’s important to be working with a broker or lawyer who is familiar with potential issues and terms that can be negotiated.

Continue Reading Cyber Insurance – What You Don’t Know COULD Hurt You!