Coverage

Turning Lemonade Into Lemons (NY)

In a recently filed Southern District of New York case, Mark Pruden v. Lemonade Inc. et al., Lemonade Insurance Agency faces a class action suit over their collection and use of customers’ biometric data without proper authorization. The complaint alleges that Lemonade, despite expressly assuring customers that it would not collect, store, analyze, or otherwise use biometric data, did in fact collect, store, and use customers’ face geometry and non-verbal cues in violation of the plaintiffs’ insurance contracts and New York’s Uniform Deceptive Trade Practices Act.

Lemonade is an insurance company largely driven by artificial intelligence (AI). The first interactions a customer has with the company are with computer programs which intake all the information required to issue an insurance policy, process a claim, or deal with any other potential interaction between the parties. To make a claim, customers are required to submit a video of themselves explaining the incident. This instant case arose as a result of, now-deleted Tweets and company-affiliated blog posts, stating that Lemonade analyzes the videos for signs of fraud and implied that it stored the videos so as to recognize claimants attempting to make multiple claims under fraudulent identities. The complaint alleges this is in express contradiction of Lemonade’s own FAQ’s and Terms of Service, which state that it does not collect biometric information (which is defined to include facial geometry and images).

As the case progresses, it will serve as an interesting case for how data privacy and technology intertwine amidst the very personal world of insurance law.

Thank you to Abby Wilson for her contribution to this post.  Please email Colleen Hayes with any questions.

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COVID Case Law Continues To Expand

In numerous suits across the country, judges are dismissing lawsuits seeking pandemic-related insurance coverage.  Recently, Hampshire House Corp., (more commonly known as the owner of the Bull and Finch – the Boston bar that inspired the 1980s classic “Cheers”), brought suit in Massachusetts federal court seeking recovery for pandemic-related losses.

In its complaint, Hampshire House Corp. sued its insurer, Associated Indemnity Corp., along with Fireman’s Fund Insurance Co. and Allianz Global Risks United States Insurance Co., asserting breach of contract, breach of the covenant of good faith and fair dealing, as well as unfair trade practices.  Although Hampshire House’s policy maintained blanket coverage limits exceeding $10 million for business income losses and expenses, the insurers declined coverage for the COVID related losses.  Specifically, the complaint alleged the losses were sustained as a result of closure orders from Governor Charlie Baker and therefore should be covered by the policy.

Ultimately, in Hampshire House Corporation v. Firemans Fund Insurance Co., et al., U.S. District Judge F. Dennis Saylor IV ruled that the presence or threat of the coronavirus does not constitute a direct physical loss of, or damage to, the particular property.  As such, the judge dismissed the complaint without leave to amend.

As more courts rule on similar claims, the case law regarding what COVID related losses will and will not be covered under a policy (a once novel issue) continues to expand.

Thank you to Paige Baldwin for her contribution to this post.  Please email Colleen Hayes with any questions.

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Time is Not On Your Side: US Southern District of New York Dismisses Insurance Class Action Suit Against Insurers On Statute Of Limitations Grounds

Plaintiff insureds brought a putative class action suit for violations of New York General Business Law (GBL), fraud, and breach of contract claims. Plaintiffs allege that in 2000 defendant sold accident disability and medical expense insurance products in violation of New York Insurance Law in that they were on not approved, that the insurance provided illusory coverage, and that the marketing included unlawful deceptive acts in violation of New York General Business Law.

Defendants moved to dismiss the plaintiff’s claims as time-barred because any and all of the alleged misrepresentations and omissions were at the time plaintiff first received coverage in the year 2000, and that suit brought in 2016 was untimely.  The policyholders argued the “continuing wrong” doctrine applied which would toll the limitation period up to the date of the commission of the last wrongful act and that the insurer’s had a continuing ongoing obligation that continued past the GBL or CPLR statute limitations date.

The court rejected the policyholders’ argument that each time they paid continuing premiums, there were separate and distinct wrongs.  Rather the Court found that after plaintiffs first purchased the policies in 2000, this was the only alleged false and misleading advertising.   The insurers took no action beyond continuing the coverage. The court held because the alleged deceptive false advertising took place when the policies were sold and because plaintiffs have not alleged they suffered injury by virtue of false and misleading advertising thereafter, the “continuing wrong” doctrine did not apply. The court also found the “equitable tolling” argument equally distinguishable because the plaintiff was on notice of the potential wrongdoing and took no steps to investigate further. Here plaintiffs became aware the policies may have violated the law by 2005 and undertook no investigation to elicit the equitable tolling doctrine applicability.  Thus, all of the plaintiff’s claims were deemed time-barred and the policyholders’ putative class action was dismissed.

If you have any questions, please contact Tom Bracken.Read More

NY Supreme Court Dismisses Policyholder Suit As Being Untimely

In the recent case Farage v. Associated Insurance Management Corp., the New York County Supreme Court considered a policyholder’s fire insurance claim for a multiunit rental property in Staten Island.  The policyholder brought suit in August 2020, 6 years from the day the property suffered a major fire loss which cost approximately $1.3 million dollars to restore.  The policyholder did not submit a claim, send an invoice, or otherwise do anything to notify the carrier it sought coverage until 2020.  Plaintiff sued for breach of contract against Tower and AmTrust including bad faith allegations seeking compensatory and punitive damages. The subject insurance policy contained the typical “legal action against us” clause which stated “no one may bring a legal action against us under this insurance unless… the action is brought within two years after the date on which the direct physical loss or damage occurred.”  Policyholder clearly violated the 2 year requirement. Surprisingly, the policyholder alleged the two year time period limitation was unenforceable because the property could not reasonably be replaced within two years. The Court conclusively held for the insurers holding that the plaintiff failed to demonstrate sufficiently that she attempted to repair the property within the two years, that the policyholder did nothing to protect her rights as the suit limitation expired, and that she didn’t satisfy any of the notice requirements of the policy .   Needless to say, the Court’s upholding of the policy language and dismissal of the policyholder’s complaint was in accordance with long held decisions that insurance carriers can set reasonable time limitations within the policy that permit both parties to understand the rights and obligations of each.  Should you have any questions, please feel free to contact Tom Bracken.Read More

5th Circuit Rules that CGL Insurance Owes Coverage for Data Breach

On July 21, 2021, the Fifth Circuit, in Landry’s Inc. v. Ins. Co. of the State of Pa., issued a pivotal decision concerning coverage for a data breach under a commercial general liability policy. Significantly, the Fifth Circuit held a commercial general liability insurer was obligated to defend its insured in an action asserting breach of contract claims arising out of an alleged data breach.

By way of brief background, in December 2015, Paymentech, LLC, a branch of JPMorgan Chase Bank that processes Visa and Mastercard payments for retail properties operated by Landry’s Incorporated, as successor in interest to Landry’s Management, LP, discovered credit-card problems at some of Landry’s properties. Ultimately, it was discovered that a data breach occurred at 14 Landry’s locations, which involved the unauthorized installation of a program designed to search for data from credit cards’ magnetic strips.  Over an approximate eighteen-month period, the program retrieved personal information from millions of customers’ credit cards and some of that information was used to make unauthorized purchases.

In May 2018, Paymentech filed suit against Landry’s for breach of contract for the costs associated with the data breaches.  Landry’s sought coverage under its commercial general liability policy with The Insurance Company of the State of Pennsylvania (“ISCOP”).  Ultimately, ICSOP disclaimed coverage to Landry’s for the underlying Paymentech action as it determined the Paymentech action did not allege any “personal and advertising injury” as required under the policy. Subsequently, Landry’s filed a lawsuit against ICSOP and both ICSOP and Landry’s moved for summary judgment. The District Court for the Southern District of Texas agreed with ICSOP’s position that Paymentech did not allege a “publication” took place or that its own privacy rights were violated.  Landry’s appealed to the Fifth Circuit.

First, the Court determined the publication requirement as defined by the policy was met because the complaint in the Paymentech action alleged Landry’s published its customers’ credit-card information.  In other words, the Court held the personal information was exposed to public view in accordance with the dictionary definition of “publish”.

Second, the Court analyzed whether the Paymentech action involves an injury “arising out of . . . the violat[ion] [of] a person’s right of privacy.” By looking to the text of the policy, the court determined the phrase “arising out of” was broad and extended to all injuries that arise out of violations of privacy violations.  Since the Court found a person has a right of privacy in his or her credit-card data and a hacker’s theft of credit-card data, the use of that data to make fraudulent purchases constitutes a “violation” of consumers’ privacy rights and the complaint in Paymentech action asserts violations of theft and fraudulent purchases, based on the plain language of the policy, ICSOP has a duty to defend.  Significantly, the court reasoned the policy did not distinguish between tort and contract damages; as such, the Court focused on the facts alleged in the complaint as opposed to the legal theories asserted.

The Court held the facts alleged in the Paymentech complaint constitute an injury arising from the violation of customers’ privacy rights.  In doing so, the Court held it did not matter whether Paymentech’s legal theories sounded in contract or tort or that individual customers did not sue Landry’s.  Rather, the Court reasoned Paymentech’s alleged injuries arise out of the violations of customers’ rights to keep their credit-card data private.  Accordingly, under Texas’ eight-corners rule, the Court held ICSOP had a duty to defend Landry’s in the underlying Paymentech action.

This decision represents a significant departure from precedent involving commercial general liability coverage and data breaches.  It will be interesting to see how this matter develops as the case is remanded for further proceedings consistent with the Fifth Circuit’s ruling.

Thanks to Lauren Berenbaum for her contribution to this post.  Please email Brian Gibbons with any questions.

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Negligence After an Intentional Act Can Still Trigger Coverage (PA)

In a recent opinion, the Middle District of Pennsylvania held negligence after an intentional act, which would traditionally exclude coverage under an insurance policy, can still constitute an occurrence thus triggering an insurer’s duty to defend under a policy. The case, Nationwide General Insurance Company and Nationwide Mutual Fire Insurance Company v. Gary DiBileo, Jr., Jerald Coyne, and Jonathan Martines, No. 3:19-CV-01003, is a declaratory judgment action arising out of underlying action brought against various defendants, that involved a freshman at Penn State passing away as a result of a night of extensive drinking and hazing at a fraternity. Nationwide had issued homeowners policies to the named defendants’ parents.  Nationwide commenced a declaratory judgment action seeking a declaration that it did not owe coverage for the underlying action.  Ultimately, Nationwide filed a motion for summary judgment asserting exclusions to coverage.

Nationwide’s arguments in its motion focused primarily on the defendants-insureds’ intentional actions, which were allegedly performed in an effort to provide some relief or care to the deceased prior to his passing. Nationwide claimed that since the acts were intentional, and the negligence thereafter resulted in the deceased’s passing, the criminal acts exclusion should apply. The court disagreed. The court reasoned that simply performing intentional acts that would traditionally fall within an exclusion prior to acting in a negligent manner did not discount the finding of an occurrence. The court continued, the negligence itself is the issue, not the intentional acts surrounding the negligence, and as such the negligence constitutes an occurrence that properly triggered Nationwide’s duty to defend.  The court did preserve Nationwide’s ability to renew the motion as the underlying action factually developed.

Thus, this case illustrates that Pennsylvania courts are likely to find a duty to defend when there are claims stemming from an insured’s intentional acts when there are also claims of negligence being asserted.

Thanks to Abigail Wilson for her contribution.  Please email Colleen Hayes with any questions.

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Appellate Division, First Department, Grants City Additional Insured Coverage in Vicarious Liability Case (NY)

In City of New York v. Travelers Prop. Cas. Co. of Am., No. 14146, 2021 WL 2690464 (N.Y. App. Div. July 1, 2021), the City of New York (the City), plaintiff, contracted with the Central Park Conservancy (CPC) to maintain Central Park.  Pursuant to this commitment, the CPC entered into a subcontract with Bartlett Tree Expert Company (Bartlett) to maintain the park’s trees.  As a requirement of this subcontract, Bartlett obtained a CGL policy from defendant, Travelers Property Casualty Company of America (Travelers), naming the City and the CPC as additional insureds. The policy provided coverage to both entities arising out of Bartlett’s operations, except that “person or organization does not qualify as an additional insured with respect to independent acts or omissions of such person or organization.”

After the Claimant was injured by a falling tree branch in Central Park, she sued the City and CPC alleging that her injury arose out of negligent acts or omissions of the City, the CPC, and/or its contractors and subcontractors.  When the City sought additional insured coverage under Bartlett’s policy, Travelers afforded insurance coverage for injuries caused by Bartlett, but not “with respect to the acts or omissions of the additional insured.” The City brought this suit in response to Travelers disclaiming coverage.

The Appellate Division, First Department, ruled in favor of the City.  The court held that the Claimant’s allegations, paired with the evidence found in the tree-service contract and business records memorializing Bartlett’s work on the trees triggered Travelers’ duty to defend. The court noted that the evidence “demonstrate[s] that there is a reasonable possibility that the City will recover under the policy’s additional insured provision, which affords coverage premised on the City’s vicarious liability for the acts or omissions of the named insured, Bartlett; therefore defendant [Travelers] is required to defend the City in the action.” The court also found that the possibility that the City may subsequently be found liable solely for its own negligent acts or omissions did not negate Traveler’s duty to defend the City.

Accordingly, this case offers guidance how New York courts will rule regarding an insurer’s defense obligations to an additional insured when independent negligence and vicarious liability claims are both being asserted against the additional insured.

Thank you to Christopher McCarthy for his contribution.  Please email Colleen Hayes with any questions.

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Employment Liability Insurance Policies Unlikely to Cover Workplace Tort Claims Brought by Non-Employee Plaintiffs

In Penn Psych Center Inc. v. US Liability Ins. Co., a Pennsylvania state court addressed, for the first time, whether employment practices liability (EPL) insurance policies generally cover the costs of tort litigation brought against an employer and their employees by third-parties with no employment relationship to the insured. The underlying action involved a suit against Penn Psychiatric Center brought by two former patients who alleged they were sexually assaulted by a Penn Psychiatric therapist. When its insurance carrier denied coverage of the underlying action, the center brought suit against that insurer claiming breach of contract, bad faith refusal of coverage, and a breach of the duty of the carrier to defend or indemnify Penn Psychiatric. Among the claims the former patients brought against Penn Psychiatric were negligent hiring and negligent supervision. The EPL policy in question enumerates covered claims, including “Workplace Tort,” under its “Wrongful Acts” section. The policy defines “Workplace Tort” as restricting coverage to “employment-related” claims. The Pennsylvania Superior Court reasoned that negligent supervision and other workplace tort claims are not considered “employment-related” when they are brought by parties without an employment relationship to the insured. Furthermore, the court read the clause “involving and brought by any Employee, former Employee, or applicant for employment” as modifying the entirety of the preceding “Wrongful Acts” provision, thus restricting the coverage of all enumerated claims against both the insured entity and individual insureds to those brought by past, present, or future employees. This interpretation was supported by both state/federal precedent and the policy’s repeated and consistent requirement that claims other than those enumerated in the “Third-Party” provision be “employment-related.” Courts across the country have held that EPL insurance policies generally do not cover claims brought by third-party plaintiffs with no past, present, or future employment relationship with the insured. The purpose of EPL insurance policies is to provide coverage for claims brought my former, current, or future employees. Multiple jurisdictions have held that workplace tort actions, including negligent retention, negligent supervision, and negligent hiring claims, are not covered by EPL policies when brought by non-employee plaintiffs. Thus, absent language expressly providing third-party or non-employment-related coverage for a particular type of claim, Pennsylvania state courts will be reluctant to interpret EPL policies as covering workplace tort actions brought by non-employees in the future. Thanks to Beatrice Segal for her contribution to this post.  Should you have any questions, feel free to contact Tom Bracken.Read More

NY District Court Breaks with Other States on COVID-19 Insurance Coverage but Leaves Door Open

New York courts have been stricter on businesses seeking insurance coverage for pandemic related damages, however, there are still possibilities of coverage even if the policy includes contamination or loss of use exclusions, as exemplified in Thor Equities, LLC v. Factory Mutual Insurance Company.

Plaintiff, Thor Equities LLC (“Thor”), a commercial landlord, rents hundreds of properties across the country for business use. Thor purchased an insurance policy from Factory Mutual Insurance Company (“FM”) that provided coverage for property damage and business interruption losses. Due to COVID-19, many of Thor’s tenants were unable to generate revenue and requested abatements or other accommodations, leading Thor to experience significant business interruption.

Broadly, the FM policy includes any insured time element loss arising out of or caused by an event of physical loss or damage. The time element provisions cover losses from the interruption of Thor’s business caused by restriction of access to the property due to an order by an authority or loss caused by physical damage. The policy also contains a “contamination” exclusion and a “loss of market or loss of use” exclusion. The contamination exclusion more specifically excludes coverage for “contamination, and any cost due to contamination including the inability to use or occupy property or any cost of making property safe or suitable for use or occupancy… only physical damage caused by such contamination may be insured….” Thor and FM dispute whether the exclusions bar the claimed losses.

The Southern District Court of New York concluded the language of the contamination exclusion is ambiguous and issues of language should not be decided in the early stages of litigation. Thor argued the exclusion failed to mention any loss due to contamination, but explicitly referenced any cost due to contamination, which indicates the exclusion does not bar coverage. FM contended the exclusion’s mention of inability to use or occupy property unambiguously excludes losses due to contamination of COVID-19. The court found the language can be reasonably debated especially when, in other parts of the policy, the difference between “cost” and “loss” is distinguished. The court, however, refused to label COVID-19 damage as physical, which differs from cases decided in New Jersey and Pennsylvania.

Regarding the loss of use market or loss of use exclusion, the court cited recent New York state court case, Visconti Bus Service, LLC v. Utica National Insurance Group, where that exclusion stated, “We will not pay for loss or damage caused by or resulting from a delay or loss of use or loss of market.” There, as in Thor, a party sought coverage for “loss of use” resulting from a COVID-19 governmental order. The court likened “loss of use” to “loss of functionality,” and found that coverage for such losses was barred by the exclusion.

In New York, government shutdown orders during COVID-19 have been interpreted to cause a loss of use of property, but not the direct physical loss of property. However, even with persuasive precedent, the court also refused to decide whether the market loss of use exclusion encompasses Thor’s alleged losses at an early stage without discovery, as Thor will further be making an argument that the losses may have been caused, not by COVID-19 itself, but by the orders of state and local authorities.

Thanks to Jamie O’Neill for contributing to this post.  Should you have any questions, please contact Tom Bracken.

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Eighth Circuit Rules in Favor of Insurers In Connection With Covid Related Losses

On July 2, the Eighth Circuit became the first federal appellate court to weigh in on whether a business could recover business interruption losses for COVID-19 related claims. In Oral Surgeons, P.C. v. The Cincinnati Insurance Co., the court affirmed a federal district court decision from the Southern District of Iowa, which rejected a policyholder’s COVID-related business interruption claim.

The Eighth Circuit reasoned that losing revenue due to government restrictions that limited the policyholder’s ability to fully utilize its premises did not constitute physical loss or damage to property. The court stated, “there must be some physicality to the loss or damage of property — e.g., a physical alteration, physical contamination, or physical destruction.” This interpretation accords with the policy’s provision that it will cover lost business income during the “period of restoration,” which ends when the property is “repaired, rebuilt or replaced.” The court reasoned that only property that had suffered physical damage would require these remedies.

This decision represents a major win for insurers nationwide. While many other courts have already upheld a strict interpretation of physical loss, some outlier decisions had created a fair share of uncertainty. Time will tell if other circuits follow the Eighth Circuit’s lead or a split emerges that warrants a decision from the Supreme Court. We will continue to keep you posted as events progress.

Thanks to Christopher McCarthy for his contribution to this post. If you have any questions or comments, please contact Colleen Hayes.

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