CASE SUMMARIES STAYING UP TO DATE ON INSURANCE POLICY LAW IS CRITICAL. HERE ARE A FEW SIGNIFICANT INSURANCE CASES DECIDED RECENTLY. By Abby Vineyard
Court Provides Context for How Policyholder’s Alleged Intent Affects Coverage Office Depot, Inc. v. AIG Specialty Insurance Co., 722 F. App’x 745 (9th Cir. 2018) Section 533 of the California Insurance Code prohibits insurers from indemnifying the policyholder for his or her willful conduct and is treated as an implied exclusion in all policies under California law. The U.S. Court of Appeals for the Ninth Circuit’s recent decision in Office Depot helped place limits on an insurance company’s ability to use this statute to deny coverage. The underlying claimant in Office Depot alleged that the policyholder violated the California False Claims Act (CFCA) in connection with unfulfilled pricing promises to various public agencies. The insurance company denied coverage of the policyholder’s defense costs and settlement of those claims. In the ensuing coverage litigation, the lower court held that, because liability under the CFCA requires a finding of willful conduct, Section 533 applied to defeat coverage of the policyholder’s liability for the CFCA claims. The Ninth Circuit reversed the lower court, concluding that, as a matter of law, the CFCA does not necessarily require proof of specific intent to defraud but, instead, only requires proof of “recklessness” as to the truth or falsity of the information at issue. Because Section 533 is an “exclusionary clause,” the court noted that the carrier had the burden of proving that the CFCA claims fell within the clause. The court concluded that the carrier failed to meet its burden and remanded the case for the trial court’s consideration of the carrier’s alternative arguments relating to exclusions and the scope of coverage. Insurance companies often use Section 533 as a bludgeon against policyholders when willful acts
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are alleged. Office Depot demonstrates that subtle distinctions in the nature of the claimant’s theory of liability against the policyholder can be determinative of whether Section 533 applies to defeat coverage.
Policyholders Finally Get Relief in Computer Fraud Cases in Second Circuit Medidata Solutions Inc. v. Federal Insurance Co., 729 F. App’x 117 (2d Cir. 2018) The U.S. Court of Appeals for the Second Circuit recently affirmed a district court’s ruling that the policyholder’s $4.8 million loss resulting from a phishing email scam was covered by a commercial crime policy’s computer fraud coverage. The policyholder was deceived into wiring funds to a fraudulent overseas account by an email that appeared to come from the policyholder’s president. The carrier denied coverage, arguing that there had been no actual manipulation of the policyholder’s computers and the loss was not the result of a spoofing attack since the policyholder itself caused the funds to be transferred. The Second Circuit disagreed, and concluded that the entry of data into the policyholder’s computer system constituted an attack and satisfied the computer fraud provision covering loss arising from the “entry of data” or “change to data elements” of a computer system. It also rejected the carrier’s causation argument, holding that the spoofing attack was the proximate cause of the policyholder’s loss, and the policyholder’s involvement in effectuating the transfer did not constitute an intervening event that broke the causal chain. This is a significant decision because the Second Circuit is the first circuit to determine that losses caused by fraudulent business email schemes using a PHP script, a programming tool used by cyber criminals to send fake emails, constitute computer fraud under a crime policy. It is an important victory for policyholders given the everincreasing rise of social engineering scams.
Policyholders May Recover Bad Faith Damages Even When No Finding of Carrier’s Breach of Contract USAA Texas Lloyds Co. v. Menchaca, 545 S.W.3d 479 (Tex. 2018) The Texas Supreme Court recently concluded that policyholders may, under certain circumstances, recover bad faith damages even when the carrier did not breach the policy. In April 2017, the trial court held that a policyholder could succeed in its claim against its carrier for damages arising out of the carrier’s violation of Texas’ bad faith practices statute, even though the carrier’s conduct did not actually breach any terms of the policy. The court explained, however, that the carrier could not be liable for extracontractual liability where the policyholder had no right to receive policy benefits and had not proved it suffered an independent injury. There was much confusion in the lower courts as to how these principles applied in practice, so the Supreme Court agreed to a rehearing and provided additional context in a new ruling issued in April 2018. On rehearing, the court affirmed the general rule that a policyholder cannot recover extracontractual damages (such as bad faith damages) if the policy affords no coverage in the first place, but clarified that if a carrier wrongfully denies coverage or withholds benefits, the lost benefits themselves can serve as “actual damages” (instead of extracontractual damages) to support a bad faith claim, even if the policyholder does not pursue or recover on a breach of contract claim. This means that policyholders need not prevail on a breach of contract theory of liability as a prerequisite to liability under the bad faith practices statute. This is a positive development for policyholders, but it bears noting that policyholders will likely still have an uphill battle when trying to recover in this manner: Recovery of bad faith damages without a finding of coverage still requires proof of either lost policy benefits or an independent injury.
Additional Insureds Are Cautioned to Read Endorsement Language Carefully Gilbane Building Co./TDX Construction Corp. v. St. Paul Fire and Marine Insurance Co., 97 N.E.3d 711 (N.Y. 2018) The New York Court of Appeals (that state’s highest court) recently answered the question of whether an additional insured must be in contractual privity with the named insured in order to be entitled to coverage, a question that had been met with divergent answers by lower courts. In Gilbane, the policyholder entered into a construction contract with a property owner that required the policyholder to name several other parties, including the plaintiff, as additional insureds on its policy. The policy’s additional insured endorsement extended coverage to “any person or organization with whom you [the policyholder] have agreed to add as an additional insured by written contract.” The policyholder listed the plaintiff as an additional insured, but the carrier denied coverage on the grounds that there was no written contract between the policyholder and the plaintiff. The putative additional insured argued that, despite the policy language, no written contract was necessary because such a requirement would conflict with the plain meaning of the endorsement, with the parties’ “reasonable expectations,” and with long-standing rules of policy interpretation. The court disagreed on the basis of its strict reading of the policy language. It concluded that the endorsement’s use of the word “with” made clear that there must be a written contract between the policyholder and the additional insured in particular – and not merely a contract between the policyholder and any party requiring additional insured coverage for the purported additional insured. This decision serves as a warning to parties seeking to add additional insureds to an insurance policy that they must carefully review the policy’s endorsement language to make sure their contractual arrangement closely follows the specific textual requirements of the endorsement.
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