Cyber Insurance for Cyber Risks
I have maintained a healthy interest in cybercrimes, cyber risks and related liability exposures, for at least two reasons central to the topics of this blog. The first is that, other than credit card companies, probably no one holds more protected personal information than the entities involved with ERISA plans, from health insurers to mutual fund companies to plan sponsors to record keepers. The second is that, from an insurance coverage perspective, developments in this area echo – more than vaguely even if less than resoundingly – the impact on insureds and on the insurance industry of the expansion of environmental liabilities approximately thirty years ago. Then, as now, you had the sudden creation of new potential liabilities – in that case, environmental exposures – that were not foreseen and taken into account by insurers in setting premiums, followed, in short order, by two developments: first, litigation over whether the exposures should be covered under previously issued policies that were not necessarily underwritten in a manner that would account for those risks and then, second, by the industry altering forms and policy language (such as the wording of pollution exclusions and the increased use of the claims made form) in reaction to those events.
You can see the beginnings of exactly those same events now, with regard to the rise of liability for cyber-crimes and related computer security breaches, as insureds, insurers and their coverage lawyers debate the extent to which standard general liability policy language captures or instead excludes those risks, while at the same time the industry develops products and policy language to respond to those exposures. A colleague and I presented this exact theory, as a lens for understanding the insurance coverage issues raised by cyber liabilities, in a major presentation last year, which is captured in this PowerPoint presentation.
I thought of this today, as I read this article pressing the idea that courts will be expanding the liabilities imposed on corporations for data and similar breaches. If the author is right, both the amount of insurance coverage litigation over coverage for cyber liabilities and the creation of new policy language by the insurance industry to deal with the issue will expand hand in hand with that development, in the same way both moved in tandem with the increase in environmental liabilities thirty years ago.
Climate Change Litigation and Insurance Coverage
I have posted in the past about how everything eventually makes its way through the insurance industry, in terms of any types of new lawsuits or liability theories, and as this article makes clear, litigation over climate change will be no different. The suits are coming, and while their viability is yet to be determined, they will pose challenges for the insurance industry, because the development of theories of liability in this area will eventually lead to demands for insurance carriers to cover the defense costs or liabilities arising from those theories, just as occurred with asbestos and pollution, and almost certainly with the same types of pitched battles over the existence of coverage as occurred in those areas. This will raise a whole host of issues for carriers that will mimic the types of issues that played out with regard to the large scale - and often unanticipated - exposure posed by environmental litigation and asbestos, only on a broader and probably even more complicated level. Just think, for instance, about how difficult it will be to develop exclusions against climate change lawsuits, if that is the direction insurers elect to go, that are broad enough to encompass the as yet unknown range of legal theories, while still being concise enough in their wording to avoid being declared ambiguous.
Deconstructing the Language of Insurance Policies
I have been thinking a lot recently about the development and history of particular aspects of insurance policy language, and how they reflect the continuing efforts of drafters to take language that can often be imprecise and refine it to more accurately reinforce what the insurer actually intends to take on as a covered risk. Over time, many policy forms are revised as insurers find that limited knowledge about a particular type of risk at the time a policy provision is first crafted or changes in the development of the law in a particular area after the initial drafting mean that the original language chosen by the policy drafters did not accurately enough capture the extent to which an insurer meant to include, or instead exclude, a particular exposure from coverage. Historically, for those old enough to remember it, my favorite example was the exclusion written by many carriers before asbestos litigation broke out in waves, that precluded coverage of claims for asbestosis. Personally, I have little doubt that those who drafted that policy language thought they were saying by that language that the policies do not cover any bodily injury/tort liabilities arising from the mining, sale, use, etc. of asbestos and asbestos based products, and that based on what the authors knew of the subject at that time, they thought they were writing such a broad limitation on coverage. As time moves on though, it becomes clear that many suits arising out of asbestos involve other physical ailments, and not just the particular disease of asbestosis. End result? Courts find that the exclusion does not apply to the other types of injuries, since they fall outside the express wording of the exclusions, which were only written as applying to asbestosis, even though the authors undoubtedly understood the word asbestosis to mean something much more than just the specific disease that would bear that name. Indeed, what possible logic could there be behind intentionally excluding just the tens of thousands of claims for asbestosis, and not the tens of thousands of claims arising from other, similar diseases that stem from asbestos exposure and inhalation?
The history of pollution exclusions in liability policies is much the same, and another classic example. It has only taken some forty years for policy language to catch up to the extent of exposure created by environmental liabilities, and the industry has spent an untold fortune covering such claims and defending against claims for coverage of such claims in the interim. That this occurred is completely understandable, as the extent of exposure for pollution losses expanded exponentially only after much of the (then) standard policy language governing this issue was written.
Of course, a sane person might ask why I am spending so much time thinking about this these days, and there are a number of answers to that question, some even halfway legitimate or rational. But the reason is primarily that very interesting articles on the historical development of particular pieces of policy language or structure keep crossing my desk, and they keep reinforcing these points.
Here are two of them. First, the D & O diarist, Kevin LaCroix, has as well written a history of the development and adoption of the breach of contract exclusion that has become standard in many forms of policies as I have seen anywhere. As he explains, insurers always understood that the insuring agreement in their policies covered tort liability, and did not expand coverage to contractual liability; in essence, insurers and insureds alike understood that policies did not cover an insured’s failure to comply with its contractual undertakings, without any need for particular or express policy language detailing that point. However, as Kevin captures in his piece, over time this understanding started to fade into the ether, and insurers found it necessary to add a specific exclusion to policies expressly stating what had, in the past, simply been understood by all concerned, without any need for an express exclusion to that effect.
The second is this historical overview of the development and expansion of claims made policies. In this instance, as the author explains, claims made policies were developed for a particular type of exposure, but because of the usefulness of that structure with regard to such issues as setting premiums and other practicalities of the insurance business, it expanded into other forms of coverage, becoming, eventually, the industry’s “go to” form of coverage.
All of these examples bring one back to the same point, which is that the seemingly dry, contractual recitations in insurance policies are actually only the current manifestation (pun intended, for any insurance coverage lawyers reading this) of what is actually a living, breathing, ever evolving form of literature.
Randy Maniloff's Top Ten Insurance Coverage Decisions for Dummies and the Rest of Us
Some bloggers blog their way to greatness, other bloggers have greatness thrust upon them. For some reason, that line popped into my head when Randy Maniloff’s always entertaining article on the top ten insurance coverage decisions of the past year appeared, like manna from heaven, in my in-box yesterday, providing one weary blogger - i.e., me - with a gift wrapped post for this morning. Substantively, there is much to be gleaned from the article and the cases it reviews, on issues ranging from the current state of trigger of coverage problems to an excellent decision on handling duty to defend disputes concerning obviously intentional conduct that has been pled as negligence for purposes of triggering insurance coverage, all written with the author’s trademark good humor and style (something anyone who reads a lot of insurance coverage briefs, opinions, articles and - yes - blogs can attest is not always present in written work in this area of the law). Moreover, the author has tossed in a free extra, a truly comical special section titled “Coverage for Dummies: The Top Ten," which collects ten excellent examples of people doing really dumb things and then demanding that their insurers protect them against the outcome.
And best of all, in what can only have been a transparent attempt by the author to garner a review on this blog, one of his top ten decisions (non-dummy division) is an ERISA case, the Supreme Court’s decision in MetLife v. Glenn. More seriously, its inclusion is almost mandatory in any collection of the most important decisions affecting the insurance industry (which, obviously, underwrites and administers the vast majority of employer provided disability plans), as it is guaranteed to generate more subsequent court rulings than any other insurance related decision of the past year, as the courts of each circuit move, over time, to realign their jurisprudence to accord with Glenn.
Ten Exciting Moments in Insurance Coverage Law, 2006
Permalink | Here is an article insurance coverage litigator Randy Maniloff is publishing in Mealey’s early next month discussing Randy’s picks for the ten most important insurance coverage decisions from across the country over the past year. The cases cover issues ranging from the absolute pollution exclusion to junk faxes, and a range of topics in-between.
While the article is useful as a primer for staying up to date on what has occurred in the insurance coverage field over the last twelve months, what I think I like the best about it is it demonstrates the breadth of issues at play in this field. Most people - including many lawyers - look at an insurance policy and see a seemingly impenetrable document; in addition, many lawyers who don’t work in this field don’t realize how diverse an area of practice it really is. Insurance coverage lawyers, however, look at insurance policies and see the untold number of issues that lurk within them, and know the range of legal and factual issues that practicing in this field can present to the practitioner. The breadth of Randy’s article really drives home that point.
Pollution Exclusions and the Reasonable Expectations Doctrine
There is an interesting decision out of the Massachusetts Supreme Judicial Court concerning the application of a policy endorsement and its mirror image exclusion to coverage of an oil leak from an oil delivery truck. The spill occurred while the truck was parked overnight, in between two separate days of delivering oil. The Supreme Judicial Court found that the oil leak fell within the coverage granted by the endorsement for the release of pollutants while being transported by the insured, and not within the exclusion for pollutants released while being stored. Neither the facts themselves nor the finding is particularly noteworthy, other than as a classic example of the traditional approach of Massachusetts courts to the interpretation of insurance policies. The court interpreted the plain language of the endorsement, and found that, particularly in light of the strict construction normally given to exclusionary language in the Commonwealth, the events at issue fit within the coverage grant and not within the language of the exclusion.
What was of more interest to me was the court's reliance on the reasonable expectations doctrine to buttress its reasoning and conclusion. The court stated:
This interpretation of the indorsement is consistent with what an "objectively reasonable insured, reading the relevant policy language, would expect to be covered." Hakim v. Massachusetts Insurers' Insolvency Fund, 424 Mass. 275, 283 (1997), quoting Trustees of Tufts Univ. v. Commercial Union Ins. Co., 415 Mass. 844, 849 (1993). As noted above, City Fuel is in the business of delivering oil to residential customers. In purchasing an indorsement that covers the oil it delivers both while it is "[b]eing transported" and, more broadly, while it is "[o]therwise in the course of transit by" the insured, an objective purchaser in City Fuel's position would reasonably believe that a release of the oil would be covered from the time the oil is loaded onto its trucks until the time it is delivered to the customer, at least in the ordinary course.
For many years, Massachusetts courts assumed the existence and application of the reasonable insured doctrine in interpreting policies. Regardless of whether and how long it has been recognized in the Commonwealth, of interest to me is the intellectual rationale for this approach to interpretation. Is it legitimate? Is it intellectually defensible?
An insurance policy is a contract, so what warrants deviating from the actual language of it, and basing an interpretation instead on the supposedly reasonable expectations of only one of the parties to the contract? A while back, at a seminar for business and particularly real estate lawyers, I responded to an inquiry from a lawyer who represents real estate developers, and who objected to the idea that the policy was a contract that should be applied as written; his objection was premised on the assertion that what was written in the policy was not always consistent with the insured's purposes in acquiring the insurance. Now there are many ways to respond to such an argument, not the least of which is that, like any contract, it is the contracting party's responsibility to insure, pun intended, that the terms as reduced to writing are consistent with the actual agreement reached by the parties.
But the inquiry got me thinking about a more fundamental question. When I was in law school, more years ago than I care to admit to, Ronald Dworkin's writings on judicial reasoning and interpretation (generally of statutes) were a terrific starting point for much thought and consternation. His key point in one of his books, which one escapes me now, was the idea of the judge as just the next person in the course of reading and understanding the particular statute, or in this case contract, at issue. As extended to a contract, the idea was that the original contracting parties were the initial authors of the contract, but the words themselves in the agreement could not possibly encompass every possible scenario to which they might apply or account for every factual variable. As a result, strict constructionism, so to speak, of the contract is impossible; there is no original intent to the document that will cover all situations. The judge, however, becomes the next author, responsible for making a principled decision as to how to expand the understanding of the contract to make it properly fit the newest events to which the contract is being applied.
At the end of the day, isn't this how we should understand the reasonable expectations doctrine, as the court inserting itself into the role of being the latest author of the policy - rather than the policy and its meaning having been fixed in stone when the contracting parties entered into it? I am not convinced this is necessarily the right way to interpret policies, and I have some truck with the reasonable expectations doctrine itself (more on that some other time), but isn't that exactly what the Supreme Judicial Court was doing in this case, and isn't that exactly what courts are doing when they declare that the reasonable expectations of one party or another dictate that the policy be interpreted today in a particular manner?
The case, incidentally, is City Fuel Corp. Vs. National Fire Insurance Company of Hartford, SJC-09623 (May 10, 2006), available here, http://www.masslawyersweekly.com/signup/opinion.cfm?page=ma/opin/sup/1007806.htm